Money & Banking

Indian banks to feel the effect of Covid second wave long after infections fade: S&P Global

Our Bureau New Delhi | Updated on July 01, 2021

The credit that banks extended, fell by about 1 per cent in the first two months of this fiscal

The second wave of pandemic is likely to impact the performance of Indian financial institutions during the first half of the current fiscal, S&P Global Ratings said on Tuesday. Talking about banks in particular, it said that lenders face systemic risk as the country sorts through the aftermath of the Covid second wave.

“The second wave has front-ended weakness in asset quality,” Deepali Seth Chhabria, Credit Analyst with S&P Global Ratings said. Further, she mentioned that financial institutions face a strained first half amid weak collections and poor disbursements. The agency feels that finance companies will likely be more impacted than banks.

Also read: NBFC-MFIs: Sector sees nearly 25% decline in FY21

S&P further said that banks have much to digest in the quarter ahead. Disbursements slowed considerably in April and May. The credit that banks extended, fell by about 1 per cent in the first two months of this fiscal. The drop was largely seasonal—there were similar declines in the same period for fiscals 2018 and 2019. “That said, strains on finance companies can go beyond this seasonal effect. For example, Bajaj Finance in its mid-quarter update said sales volumes for its consumer durables and auto finance businesses in May were just 40 per cent of what the management expected. We believe credit growth in India started improving in June, and will continue to do so,” it said.

Affected sectors

The ratings agency also mentioned that the collection efficiency for a number of finance companies fell by up to 5-15 per cent in April and May, largely due to lockdowns. Lenders catering to prime borrowers were generally less affected. SME borrowers, who comprise about 17 per cent of total loans, and low-income households have been most affected.

Tourism and recreation related sectors, commercial real estate, and unsecured retail loans may contribute to higher non-performing loans (NPLs or NPA). However, “the banking system’s exposure to many of these segments is moderate and should have only a limited effect. Housing finance (excluding affordable housing) and gold loans will likely be less affected compared with financing for micro enterprises or commercial vehicles,” the agency said.

It further noted that banks are better prepared to bounce back from the second wave than they were during the last downcycle. Institutions have continued to raise capital from the equity markets and the government.

Bounce-back

Private sector banks such ICICI Bank and Axis Bank raised equity capital in the last fiscal year, and public sector banks have jumped on this bandwagon. IDBI Bank raised ₹14.4 billion in equity in December 2020. Indian Bank also raised ₹16.5 billion in equity in June. Many other banks have also announced plans to raise capital, including hybrid capital.

The agency said that banks have already created Covid-related provisions of 0.5-1.5 per cent of loans. Additionally, the central bank has allowed banks to use all other floating and counter-cyclical provisions to address NPLs. “The next six months should be defined by the effectiveness of policies to contain long simmering bank-sector strains, with much potential for Covid-related flare-ups,” Geeta Chugh, Credit Analyst with S&P Global Ratings said.

Published on June 30, 2021

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