NEW YORK: The economic disruption caused by the coronavirus pandemic is likely to harm Indian banks’ balance sheets and financial performance for at least the next two years, particularly for state banks, which are most vulnerable, said Fitch Ratings on Wednesday.
According to Fitch Ratings, banks are yet to feel the effects of India’s strict lockdown measures to contain the pandemic, with the severity dependent on the pace of economic recovery. The country started easing lockdowns in many states in June 2020, which led to a pick-up in economic activity, but the acceleration of new COVID-19 cases threatens the resumption of normal business activity, causing continued disruption to business, supply chains and shrinking personal incomes.
Fitch’s moderate stress test reveals that the Indian banking system is likely to require recapitalisation of around USD15 billion in the financial year-ending March 2022 to meet minimum regulatory-capital norms. However, capital requirements would soar to around USD58 billion should the economic contraction be more severe than we expect.
State-owned banks entered the crisis on a weak footing, with high impaired loans and depleted loss-absorption buffers. They now face the risk of further losses and capital erosion, with rising impaired loans. This is despite regulatory measures announced by the Reserve Bank of India, including a 180 day moratorium on the recognition of impaired loans and relaxation of bank-lending limits.
According to Fitch Ratings, there is a vital need for timely and adequate capital injections in light of the disproportionate burden placed on banks to support distressed sectors through increased credit.
“We expect economic activity to contract by 5 percent in FY21, with considerable downside risk to our forecast, as evident from the June 2020 revision of our Outlook on India’s rating (BBB-) to Negative, from Stable,” predicted Fitch Ratings.
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