Systemic risk to stay high for Indian banks amid second Covid surge: S&P

Rating agency Standard & Poor’s today said the systemic risk facing banks in India is likely to remain high in the wake of the second wave of Covid-19 infections and the high proportion of weak loans.

This is despite India's economic recovery, though the central bank and the government’s efforts to cushion the effects of the economic crisis will limit the stress on the balance sheets of these banks.

The control of Covid-19 remains a key risk for the economy. New infections have spiked in recent weeks and the country is in the middle of a second pandemic wave. Some targeted lockdowns have already been implemented and more will likely be needed. The impact of broader lockdowns on the economy could be substantial, depending on their length and scope, S&P said in a statement.

“We expect good growth prospects for the Indian economy over the next couple of years. The economy has recovered briskly over the past several months. We forecast growth of 11 per cent for fiscal 2022, followed by a 6.1-6.3 per cent increase for next couple of years”, it added.

The Indian banking system's weak loans are expected to be at 11-12 per cent of gross loans. The credit losses will decline to 2.2 per cent of total loans for fiscal 2022, and 1.8 per cent for fiscal 2023, after staying elevated at an average of 2.8 per cent in fiscals 2016-2021”, S&P said.

The expected credit costs for banks in India are in line with those for banks in other emerging countries such as China and Thailand. However, provisioning coverage in China and Thailand is much higher than in India.

Indian banks' reported non-performing loans (NPLs) likely surged in the last quarter of fiscal 2021. A large portion of the increase will be driven by the country's apex court's lifting of a ruling that barred banks from classifying any defaults as nonperforming assets. Banks' NPLs would have generally been higher by 60-170 basis points in the absence of the court ruling.

Rating agency said the balance sheet weakness in smaller businesses is likely to contribute to incremental NPLs for Indian banks. Service sectors such as airlines, hotels, malls, multiplexes, restaurants, and retail have seen a significant loss of revenue and profit on account of Covid-19 containment measures.

Meanwhile, retail loans, especially unsecured personal loans and credit card loans, could also contribute to higher NPLs.

The government's emergency credit guarantee scheme for new loans to small and midsize enterprises (SMEs) has supported liquidity for these cash-strapped entities. However, the solvency of SMEs is unlikely to be restored entirely.

In March 2021, the government extended the period for availing the credit guarantee scheme to June 2021, and widened its scope. This would reduce stress on banks' balance sheets, the rating agency added.