Banks' asset quality to worsen but face less risk of defaults: Moody's

The disruptions from the coronavirus outbreak will strain finances for households and small businesses more severely

Ratings agency Moody’s on Wednesday said corporate houses will not be immune to the deep economic contraction in India following the Covid-19 outbreak. However, risks from corporate loans are lower now than in the 2012-19 period as both banks and corporate houses took steps to repair asset quality and financial profile.

The Covid disruption will strain finances of households and small businesses more severely, Moody’s said. “While asset quality risks are rising for Indian banks amid the country’s economic contraction, risks from corporate loans have decreased from the previous credit cycle,” Moody’s said.

“Corporates will not be immune from the ongoing contraction… Near-term stress at corporates is already visible in the very weak performance in the quarter ended June 2020,” says Srikanth Vadlamani, vice-president and senior credit officer at Moody’s.

Lending in the past few years has been concentrated towards stronger companies amid an overall slowdown in capital expenditure, while banks have also become more conservative in selecting borrowers.

Among the corporate sectors, loans to finance and real estate companies, which together make up a large share of total bank loans, are most at risk. Both sectors are facing operating cash-flow challenges.

Sectors most affected by the pandemic and the lockdown, such as transportation and hospitality, are also vulnerable, although banks’ direct exposures to these borrowers are relatively small, the rating agency added.