Indian banks face systemic risk

S&P Global Ratings on Wednesday said Indian banks face a systemic risk as the second Covid wave will impair the performance of financial institutions in the April-September period.

Stating that economic recovery remains highly vulnerable to setbacks due to Covid, particularly if fresh outbreaks trigger new lockdowns, S&P said the banking sector's weak loans will likely remain elevated at 11-12 per cent of gross loans in the next 12 to 18 months. "The second wave has front-ended weakness in asset quality," said S&P Global Ratings Credit Analyst Deepali Seth Chhabria.

"Financial institutions face a strained first half amid weak collections and poor disbursements." Indian banks face systemic risk as the country sorts through the aftermath of the Covid second wave. Lenders struggled with a high level of weak loans well before the pandemic struck and clearly, conditions have deteriorated, S&P said in a statement.

The government has announced support for the microfinance and tourism sectors that should help struggling borrowers. This support comes on top of the recently extended loan guarantees to Small and Mid-size Enterprises (SMEs). S&P said it expects the second wave to impair the performance of Indian financial institutions in the first half of fiscal year 2022, with much resting on the effectiveness of government measures to address this problem.

"A Covid resurgence involving new and potentially aggressive variants, and a vaccine rollout that undershoots our current expectations, remain the key downside risks. "Limited vaccine supplies and people's reluctance to take doses have held back the country's inoculation programme. Fully vaccinating roughly 70 per cent of the country will likely take at least until the first half of 2022. This leaves the economic recovery highly vulnerable to Covid setbacks, particularly if fresh outbreaks trigger new lockdowns," S&P noted.

The US-based rating agency said the Indian economy has been in recovery mode since June, following a sharp contraction in the economic activity in April and May after localised lockdowns across much of the country. The latest outbreak has less severely affected the country's manufacturing and exports than was seen during the first wave of infections, in 2020, but services continue to be disrupted.