Indian banking system most exposed to economic, fiscal shocks in 2021: Moody’s

The Indian banking system is one of the most exposed to the economic and fiscal consequences of a shock to the financial sector in 2021, a research report from rating agency Moody’s say.

Moody’s sees a considerable risk to the global banking system in 2021 as three quarters of its 70 banking system outlooks – including all G-20 countries except Canada – are negative, which is way higher than only 14% in 2019.

These outlooks broadly reflect the risk that weakening operating conditions, particularly in key sectors such as hospitality and retail, will lead to a deterioration in loan performance and profitability, and potentially undermine confidence in banks, as seen in past crises.

Among this group, Italy and India are most exposed to the economic and fiscal consequences of a shock to the financial sector.

On a macro level, banks face risks stemming from a potential resurgence of coronavirus cases with extended disruption, which would lead to lower economic growth and higher loss provisions.

The Moody’s report says that the unwinding of policy support going into 2021 may result in rising credit costs, and the lower-for-longer interest rates will continue to impact banking systems’ profitability. In addition, increased corporate debt burdens will add to banks’ asset risks and as supportive measures ease, corporate default rates will rise.

The report says that the credit strength of many banks will become increasingly vulnerable to the extent that the economic shock broadens and lengthens. Banks’ credit strength will hinge on their ability to return capital to pre-pandemic levels over the medium term.

Curiously, Moody’s report also says that digitization will make banks exposed to greater risk of cyber attacks and more vulnerable to competition from fintech. “Bank digitalization momentum is building as new technologies emerge and as the Coronavirus pandemic brings more people online. Faster technology adoption will deepen financial inclusion but also raise adjustment issues ranging from higher risk of cyber attacks to potentially disruptive innovations such as digital currencies,” says the report.