Strong buffers will help Indian banks withstand rising asset risks from coronavirus resurgence: Moody’s
A second wave of coronavirus infections in India is increasing asset risks for banks, exacerbating stress among individuals and small businesses that were hit the hardest by the initial outbreak. Still, a number of factors will prevent sharp increases in problem loans, and banks have sufficient buffers to absorb anticipated loan losses, rating agency Moody’s say in its recent report.
According the Moody’s report, second wave of coronavirus cases will lead to new loan impairments but a severe deterioration of banks’ asset quality is unlikely. Nonperforming loans (NPLs) will increase more quickly than during the first wave because new lock downs to contain the resurgence of the coronavirus will further erode savings and earnings among many self-employed individuals and small and medium-sized enterprises (SMEs) that have already suffered financially. Yet economic recovery, a tightening of loan underwriting criteria initiated prior to the pandemic and continued government support will prevent sharp increases in NPLs. As a result the resurgence in coronavirus cases will delay but not significantly derail improvements in banks’ balance sheets that had begun a few years
prior to the pandemic.
However, the need to tackle new problem loans caused by the pandemic will prolong lenders’ efforts to clean up legacy NPLs, believes Moody’s.
Improved buffers will help banks withstand asset quality deterioration, says Moody’s. Loss absorbing buffers at most rated banks have strengthened in the past year as a result of increases in capital and loan-loss reserves, coupled with improvements in profitability.
This will enable lenders to withstand the anticipated deterioration of asset quality and maintain their credit strength. For public sector banks, our baseline expectation is that newly formed NPLs will increase nearly 50% in the next two years, but banks’ average NPL ratio will still edge down by the end of March 2023, largely a result of the resolution of legacy NPLs and an acceleration of credit growth, which will offset increases in new NPLs
Also Read: RBI report suggests gross NPAs of banks may double to 14.8% by Sept 2021
