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Indian Banks Bad Debt, Credit Costs To Rise As Liquidity Tightens: Fitch Ratings

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Improving financial measures by Indian banks do not fully reflect the impact of the coronavirus pandemic, and bad debts and credit costs are likely to rise as liquidity tightens, Fitch Ratings said on Monday.

The impact of the COVID-19 pandemic is likely to pose challenges to improving the financial performance of Indian banks once asset quality risks emerge in the fiscal year ending March 2022 , did he declare.

“The operating environment remains challenging as the industry tries to balance a slowly recovering economy while preserving moderate loss absorption cushions. Fitch expects bad loans and credit costs to rise as they go. that the conditions for forbearance and easy liquidity ease, “the rating agency said.

He said public banks are more vulnerable than private banks, given their participation in relief measures, while their earnings and core capital are low.

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“Fitch expects a moderately worse sector outlook for Indian banks for 2021-2022 based on moderate expectations for new business and revenue generation, and deteriorating asset quality. The recapitalization plans government less than adequate for its banks further underline the risk, which will likely keep risk aversion high among banks amid persistent uncertainty over asset quality and an uneven economic recovery, “a Fitch Ratings said in a statement.

Struck by the pandemic and the ensuing national lockdown to control the spread of infections, India’s economy contracted 24.4% in April-June 2020 and 7.3% in July-September of the year . GDP growth returned to positive territory in the October-December quarter, increasing 0.4 percent.

The aggregate ratio of non-performing loans (NPL) of Indian banks fell to 7.2% at the end of December 2020 from 8.5% at the end of March 2020. monitoring and loans in arrears of more than 60 days, which accounted for 4, 2% of loans, Fitch Ratings said.

“The average contingency reserves of 0.7% of loans are insufficient to absorb the increased stress, although private banks are well above average. Fitch sees a high risk of a prolonged deterioration in asset quality with increased pressure on loans to distressed individuals and SMEs (8.5% of loans, 1.7% government guaranteed), ”he said. -he adds.

The disproportionate shock to India’s informal economy and small businesses, coupled with high unemployment and declining private consumption, has yet to fully manifest itself on bank balance sheets, Fitch Ratings said.

However, private banks, he said, are in a better position to exploit growth opportunities in 2021, as their higher contingency reserves provide better earnings and greater resilience of capital. The average cushion for state banks between pre-provision earnings and credit costs is only 160 basis points compared to 340 basis points for private banks.

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