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The coronavirus wave will lead to new problem loans in the retail and SME segments, but a severe asset quality decline is unlikely, according to Moody’s Investors Service.
Banks’ improved profitability, capital and loss buffers will help them absorb anticipated loan losses and maintain credit strength, the global credit agency said in a report.
Moody’s observed that India’s second coronavirus wave is increasing asset risks for banks, but the country’s economic recovery, a tightening of loan underwriting criteria and continued government support will prevent a sharp spike in problem loans.
Stable NPL ratio
The agency’s baseline expectation is that newly formed non-performing loans (NPLs) at public sector banks will increase nearly 50 per cent to about 1.5 per cent of gross loans annually in the next two years.
Nevertheless, banks’ average NPL ratios will remain broadly stable, driven by the resolution of legacy NPLs and acceleration of credit growth, the global credit rating agency said in a report.
“A severe deterioration of banks’ asset quality is unlikely, despite an expected rise in new loan impairments, particularly among individuals and small businesses that were hit hardest by the virus outbreak.
“This is because government initiatives like the emergency credit-linked guarantee scheme (ECLGS) have been effective in providing immediate liquidity for businesses,” Alka Anbarasu, a Moody’s Vice President and Senior Credit Officer, said.
In addition, accommodative interest rates and loan restructuring schemes will continue to mitigate asset risks, such that the coronavirus resurgence will delay but not derail the improvements in banks’ balance sheets that had begun before the pandemic.
Moody’s said the banks rated by it also have stronger loss-absorbing buffers, which will help them withstand the asset quality decline and maintain their credit strength.
Banks had reinforced these buffers in the past year through increases in capital, loan-loss reserves and profitability, it added.
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