Indian banks face tough operating environment in near term: Fitch

Fitch Ratings on Tuesday said Indian banks face a tough operating environment in the near term as stressed loans and write-offs increase due to the economic fallout from the coronavirus pandemic.

It said limited room for fiscal support, fragilities in the financial system and a continuing rise in COVID-19 cases are hampering normalisation of activity.

"Indian banks face a tough operating environment in the near term, as stressed loans and write-offs increase as a result of the economic fallout from the coronavirus pandemic, but a swift economic recovery will be critical to limiting loan losses in what is likely to be a protracted period of weakness in the asset-quality cycle," Fitch Ratings said in a statement.

Banks have been permitted by the Reserve Bank of India (RBI) to undertake a one-time restructuring exercise of loans affected by the pandemic, which will provide relief in terms of bad loan recognition and provisioning, Fitch said.

"However, the exercise could leave the sector saddled with a high bad loan burden over the next few years if restructured loans do not perform according to agreed milestones," it added.

Fitch said the central bank's data shows that Indian banks wrote off nearly USD 85 billion over FY14-FY19, of which state-owned banks contributed nearly 80 per cent.

"The economic stress this time around is set to be deeper and more broad-based, which could make restructuring more challenging. Execution risk remains high, notwithstanding the safeguards built in by RBI in terms of tighter timelines, penal provisioning and more monitoring by the expert committee of loans beyond Rs 15 billion," Fitch said.

State-run banks have a significantly higher share of loans under moratorium than their private-sector peers, it added.

Fitch does not expect GDP to return to pre-pandemic levels until first quarter of 2022.

Fitch has projected Indian economy to contract 10.5 per cent in the current fiscal and expects growth to rebound to 11 per cent in fiscal 2021-22, with downside risks.

Indian economy contracted 23.9 per cent in April-June quarter of current fiscal.