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The impact of Covid-19 pandemic is likely to pose challenges to improving financial performance of Indian banks once asset-quality risks manifest in the financial year ending March 2022 (FY22), Fitch Ratings said on Monday.
The banks reported lower impaired loans and improved profitability for nine months ended December 2020 due to various forbearance measures and continued large write-offs.
Particularly, government-owned banks remained more risk averse than in prior years which was reflected in their weak credit growth.
Fitch said it expects a moderately worse sector outlook for Indian banks for 2021-22 based on muted expectations for new business and revenue generation, and deteriorating asset quality.
The government's less-than-adequate recapitalisation plans for its banks further underscores the risk which will likely keep risk aversion high among banks amid continuing uncertainty about asset quality and an uneven economic recovery, it said.
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"The disproportionate shock to India's informal economy and small businesses coupled with high unemployment and declining private consumption have yet to fully manifest on bank balance sheets."
The banks' impaired-loans ratio declined by 130 basis points to 7.2 per cent at 9M FY21 but it is yet to factor in the majority of pandemic stress which is unrecognised due to judicial intervention or forbearance.
As these measures unwind, Fitch expects banks to reverse the improvements in asset quality and profitability with state banks more vulnerable to higher stress than private banks, which have better profitability and higher contingent reserves and capitalisation.
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