Covid-19 pandemic may set back banks' recovery by years, says S&P

The Covid-19 pandemic may set back the recovery of banks by years, which would hit credit flows and, ultimately, the economy, Standard and Poor’s (S&P) said on Tuesday.

It also expects non-performing assets (NPAs) to hit a fresh high this year. “In base case, we expect the NPAs to shoot up to 13-14 per cent of total loans in the fiscal year ending March 31, 2021 (FY21), compared to an estimated 8.5 per cent in the previous fiscal year,” said the rating agency in its report titled ‘Covid and Indian banks: One step forward, two steps back’ released on Tuesday.

Recent aggressive reforms, including the new bankruptcy law, have helped lenders get their bad assets and credit costs under control. A $30-billion recapitalisation also improved the situation at publicly owned banks in the last four years.

But the Covid-19 pandemic will likely slow the resolution of bad-debt situations, saddling banks with a huge stock of bad loans next year. “We assume only about a 100 basis-point improvement in NPAs in FY22,” it added.

The effect on finance companies will be more pronounced than on banks, it said. This is mainly because some finance companies lend to weaker customers and have high reliance on wholesale funding. These companies were already facing a trust deficit since the 2018 default of Infrastructure Leasing & Financial Services.

Finance companies also face accentuated liquidity risks due to a high proportion of borrowers opting for the loan moratorium, the rating agency said.

Credit growth is expected to remain weak in the current fiscal year. “We estimate low single-digit loan growth for the system for the current year, mainly driven by government-guaranteed small businesses loans and the capitalisation of accumulated interest,” S&P said.

The government on May 26 launched a Rs 3-trillion emergency credit scheme for micro, small and midsize enterprises, to help them tide over the pandemic’s impact. Otherwise, lending should remain slow due to tepid demand and banks turning risk averse (despite ample liquidity), it said.