Fitch Ratings on Friday said the second COVID-19 wave poses increased risks for IndiaтАЩs fragile economic recovery and its banks.
The rating agency expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify if rising infections and follow-up measures to contain the virus further affect business and economic activity.
IndiaтАЩs active COVID-19 infections have been increasing at a rapid pace with new infections exceeding 1 lakh a day in early April.
тАЬThe governmentтАЩs more accommodative fiscal stance may also mitigate some short-term growth pressures,тАЭ Fitch said. тАЬHowever, inoculating IndiaтАЩs large population in a fast and effective way will be important to avoid repeated disruptions,тАЭ it said.
Fitch forecasts IndiaтАЩs GDP growth at 12.8% for the current financial year and this incorporates expectations of a slowdown in the April-June quarter due to the flare-up in new coronavirus cases. But the rising pace of infections poses renewed risks to the forecast.
Infections concentrated
тАЬOver 80% of the new infections are in six prominent States, which combined account for roughly 45% of total banking sector loans. Any further disruption in economic activity in these States would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely,тАЭ Fitch Ratings said in a statement.
The operating environment for banks will most likely remain challenging. The second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banksтАЩ prospects for new business.
There are also asset quality concerns since banksтАЩ financial results are yet to fully factor in the first waveтАЩs impact and the stringent 2020 lockdown due to the forbearance in place.
тАЬWe consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk. Retail loans have been performing better than our expectations, but might see increased stress if renewed restrictions impinge further on individual incomes and savings.
тАЬMSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring,тАЭ the ratings agency noted.
It said the extension of the MSME refinancing scheme until June 30, will alleviate short-term pain, but potentially add to the sectorтАЩs exposure to stressed MSMEs, which was around 8.5% of loans at the end of December, as per FitchтАЩs estimate.
