Spike in India bank's stressed loans slower due to govt measures: Moody's

Global rating agency Moody’s said The Indian government's support measures for bank borrowers have softened growth in non-performing loans (NPLs), averting the risk of a sharp deterioration in asset quality.

“Ample domestic liquidity, loose monetary policy, moratoriums on loan repayments and government guaranteed loans to small businesses have supported Indian banks’ asset quality. As a result, restructured loans have not increased as much as we expected at the onset of the pandemic,” said Alka Anbarasu, a Moody’s Vice President an d Senior Credit Officer. 

The Financial Stability Report in January 2021 had estimated that gross non-performing assets of banks in India may grow from 7.5 per cent in September 2020 to 13.5 Per cent by September 2021 under baseline scenario. The ratio may escalate to 14.8 per cent under a severe stress scenario.

Moody’s said India’s economic recovery will support borrowers after the expiry of government support measures, which have slowed growth in private-sector banks’ NPAs.

Banks can absorb unexpected losses, while strong deposit growth boosts liquidity and helps reduce funding costs.

Asset performance at India's largest private sector banks including HDFC Bank, ICICI Bank, AXIS Bank, IndusInd Bank was better than Moody’s expected in the nine months to December 2020.

On the other hand, Yes Bank Limited (B3 stable, caa2), which was rescued by Indian authorities in 2020, faces greater asset risks than its peers, although its capitalization, liquidity and funding have improved.

A recovery in India's economy in 2021 will support borrowers' debt-servicing capability after the support measures expire. As a result, a sharp deterioration in asset quality is now less likely than Moody’s previously anticipated.

“Proactive efforts to raise fresh capital, improving profitability and increased loan loss reserves

enable Indian banks to absorb unexpected losses, which will support their credit profiles,” adds Anbarasu.

Strong deposit growth further enhances liquidity and helps reduce funding costs. Deposit growth outpaced loans at most banks through the third quarter of fiscal 2021 as consumers and businesses cut spending amid economic uncertainty, bolstering already robust liquidity at these banks, it added.