Second Covid-19 wave heightens risks for Indian banks, says Fitch

Agency already sees moderately deteriorating environment for sector in 2021. Headwinds will intensify if rising infections and follow-up measures to contain the virus further affect business

Rating agency Fitch today said the second wave of Covid-19 infections poses increased risks for India's fragile economic recovery and its banks.

Fitch already expects a moderately worse environment for the Indian banking sector in 2021. But, headwinds would intensify should rising infections and follow-up measures to contain the virus further affect business and economic activity.

India's active Covid-19 infections have been increasing at a rapid pace; new infections exceeded 100,000 a day in early April 2021, against 9,300 in mid-February 2021.

Fitch forecasts India's real GDP growth at 12.8 per cent for the financial year ending March 2022 (FY22). This factors in a slowdown due to the flare-up in new coronavirus cases but the rising pace of infections poses renewed risks to the forecast.

Over 80 per cent of the new infections are in six prominent states, which combined account for roughly 45 per cent of total banking sector loans.

Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely.

Fitch said the operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further supress banks' prospects for new business.

There are also asset quality concerns since banks' financial results are yet to fully factor in the first wave's impact and the stringent 2020 lockdown due to the forbearances in place.

“We consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk. Retail loans have been performing better than our expectations but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring”, Fitch added.

Private banks are more exposed to retail but also have much better earnings capacity. Their average pre-provision operating profit (PPOP) was 4.85 per cent of loans 9MFY21), contingency reserves (1.2 per cent of loans) and core capitalisation (CET1 ratio: 15.9 per cent) could aid to withstand stress on their portfolios.

In contrast, state-owned banks remain more vulnerable as their prevailing weak asset quality and greater participation in relief measures are not commensurate with their limited loss-absorption buffers. Their average PPOP was 3 per cent, contingency reserves of 0.5 per cent and core capitalisation - CET1 ratio of 9.8 per cent.