Indian banks strong buffers to limit risk of COVID-19 resurgence: analyst

Several factors will help Indian banks mitigate their risks.

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, according to a report by Moody's Investors Service.

Moody’s said that the second infection wave will lead to new problem loans in the retail and SME segments, but a severe asset quality decline is unlikely due to the banks' improved profitability, capital, and loss buffers which will help them absorb anticipated loan losses and maintain credit strength.

"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 have been effective in providing immediate liquidity for businesses," Alka Anbarasu, vice president and senior credit officer at Moody’s said

Additionally, 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 it expects newly formed nonperforming loans (NPLs) at public sector banks will increase nearly 50% to about 1.5% of gross loans annually in the next two years. Nevertheless, banks' average NPL ratios will remain largely stable, driven by the resolution of legacy NPLs and acceleration of credit growth.