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2nd Covid-19 Wave Increased Banks’ Asset Quality; Severe Deterioration Unlikely: Moody’s

moody's

Moody’s Investors Service on August 26 said the second wave of Covid-19 has increased asset risks for Indian banks, but a worsening situation is unlikely. 

It said that the second wave of coronavirus in India has aggravated stress among individuals and small businesses that suffered severely in the first wave. Still, several factors can prevent sharp increases in problem loans, and banks have sufficient buffers to absorb the predicted loan losses.

Economic recovery, a tightening of loan underwriting criteria and persistent government support may avert a rise in problem loans, it said.

“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 (ECLGS) have been effective in providing immediate liquidity for businesses,” Moody’s Vice President and Senior Credit Officer Alka Anbarasu said. 

Also, accommodative interest rates and loan restructuring schemes will continue to minimise asset risks, such that the coronavirus resurgence will delay but not derail the improvements in banks’ balance sheets that had started before the pandemic hit.

According to Moody’s, in the next two years, newly formed non-performing loans (NPLs) at public sector banks would grow approx 50% to roughly 1.5 per cent of gross loans annually.

Nevertheless, banks’ average NPL ratios will remain largely stable, largely because of resolution of legacy NPLs and acceleration of credit growth, Moody’s added. 

“Loan delinquencies have materially increased within self-employed retail segments such as credit cards, personal loans as well as loans to small and medium enterprises. In our baseline scenario, we expect new NPL formation to increase by 50 per cent over the next two years to about 1.5 per cent of gross loans from 1 per cent of gross loans in fiscal 2021,” Alka Anbarasu, Vice President and Senior Credit Officer, Financial Institutions, Moody’s Investors Service told a digital wing of business daily- Financial Express.

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Harshita Sharma

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