Second wave poses increased risks for fragile recovery, banks: Fitch

Firm sees stress in MSME, retail loans

Fitch Ratings on Friday said the second COVID-19 wave poses increased risks for India’s fragile economic recovery and its banks.

The rating agency expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify if rising infections and follow-up measures to contain the virus further affect business and economic activity.

India’s active COVID-19 infections have been increasing at a rapid pace with new infections exceeding 1 lakh a day in early April.

“The government’s more accommodative fiscal stance may also mitigate some short-term growth pressures,” Fitch said. “However, inoculating India’s large population in a fast and effective way will be important to avoid repeated disruptions,” it said.

Fitch forecasts India’s GDP growth at 12.8% for the current financial year and this incorporates expectations of a slowdown in the April-June quarter due to the flare-up in new coronavirus cases. But the rising pace of infections poses renewed risks to the forecast.

Infections concentrated

“Over 80% of the new infections are in six prominent States, which combined account for roughly 45% of total banking sector loans. Any further disruption in economic activity in these States would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely,” Fitch Ratings said in a statement.

The operating environment for banks will most likely remain challenging. The second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banks’ prospects for new business.

There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearance in place.

“We consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk. Retail loans have been performing better than our expectations, but might see increased stress if renewed restrictions impinge further on individual incomes and savings.

“MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring,” the ratings agency noted.

It said the extension of the MSME refinancing scheme until June 30, will alleviate short-term pain, but potentially add to the sector’s exposure to stressed MSMEs, which was around 8.5% of loans at the end of December, as per Fitch’s estimate.

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