The second wave of COVID-19 infections will lead to new problems for loans in the retail and SME segments, but improved profitability, capital and strong buffers of banks will help them absorb anticipated loan losses and maintain credit strength, Moody’s Investors Services said in a report on Indian banks.
“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 the hardest by the virus outbreak,” said Alka Anbarasu, a Moody’s vice president and senior credit officer.
“This is because government initiatives like the emergency credit linked guarantee scheme (ECLGS) have been effective in providing immediate liquidity for businesses,” she said.
In addition, accommodative interest rates and loan restructuring schemes would continue to mitigate asset risks, such that the coronavirus resurgence would delay, but not derail the improvements in banks’ balance sheets that had begun before the pandemic Moody’s said.
The agency said in the case of the second wave, non-performing loans (NPLs) would increase more quickly than during the first wave as new lockdowns to contain the resurgence of the coronavirus would further erode savings and earnings among many self-employed individuals and small and medium-sized enterprises (SMEs) that had already suffered financially.
“Yet economic recovery, a tightening of loan underwriting criteria initiated prior to the pandemic, and continued government support would prevent sharp increases in NPLs,” Moody’s said. “As a result, the resurgence in coronavirus cases will delay but not significantly derail improvements in banks’ balance sheets that had begun a few years prior to the pandemic” it said.
However, the need to tackle new problem loans caused by the pandemic would prolong banks’ efforts to clean up legacy NPLs, Moody’s added.
Published - August 26, 2021 10:51 pm IST
