Indian banks will be able to withstand rising asset risks, says Moody's

 The rating agency in a statement said that banks' improved profitability, capital and loss buffers will help them absorb anticipated loan losses and maintain credit strength

India's second Coronavirus (Covid-19) wave is increasing asset risks for banks in retail and the SME loan segment. However, factors like tight credit underwriting, strong loss provisions will help banks withstand pressures and prevent a sharp rise in bad loans, according to rating agency Moodys.

The rating agency in a statement said that banks' improved profitability, capital and loss buffers will help them absorb anticipated loan losses and maintain credit strength. Also, the country's economic recovery and continued government support will prevent a sharp spike in problem loans.

Moody's baseline expectation is that newly formed non-performing loans (NPLs) at public sector banks will increase nearly 50% to about 1.5% of gross loans annually in the next two years. Nevertheless, banks' average NPL ratios will remain largely stable, driven by the resolution of legacy NPLs and the acceleration of credit growth.

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. Government initiatives like the emergency credit-linked guarantee scheme (ECLGS) have been effective in providing immediate liquidity for businesses, said Alka Anbarasu, vice president and senior credit officer at Moody's.

In addition, accommodative interest rates and loan restructuring schemes will continue to mitigate asset risks. The Covid-19 resurgence will delay, but not derail the improvements in banks' balance sheets that had begun before the pandemic.

Moody's-rated banks also have stronger loss-absorbing buffers, which will help them withstand the asset quality decline and maintain their credit strength. Banks had reinforced these buffers in the past year through increases in capital, loan-loss reserves, and profitability.