The Covid-19 pandemic may set back the recovery of banks by years, which might hit credit score flows and, finally, the financial system, Standard and Poor’s (S&P) stated on Tuesday.
It additionally expects non-performing assets (NPAs) to hit a contemporary excessive this 12 months. “In base case, we expect the NPAs to shoot up to 13-14 per cent of total loans in the fiscal year ending March 31, 2021 (FY21), compared to an estimated 8.5 per cent in the previous fiscal year,” stated the score company in its report titled ‘Covid and Indian banks: One step forward, two steps back’ launched on Tuesday.
Recent aggressive reforms, together with the brand new chapter legislation, have helped lenders get their dangerous property and credit score prices underneath management. A $30-billion recapitalisation additionally improved the state of affairs at publicly owned banks within the final 4 years.
But the Covid-19 pandemic will seemingly gradual the decision of bad-debt conditions, saddling banks with an enormous inventory of dangerous loans subsequent 12 months. “We assume only about a 100 basis-point improvement in NPAs in FY22,” it added.
The impact on finance corporations can be extra pronounced than on banks, it stated. This is especially as a result of some finance corporations lend to weaker prospects and have excessive reliance on wholesale funding. These corporations had been already dealing with a belief deficit for the reason that 2018 default of Infrastructure Leasing & Financial Services.
Finance corporations additionally face accentuated liquidity dangers resulting from a excessive proportion of debtors choosing the mortgage moratorium, the score company stated.
Credit development is anticipated to stay weak within the present fiscal 12 months. “We estimate low single-digit loan growth for the system for the current year, mainly driven by government-guaranteed small businesses loans and the capitalisation of accumulated interest,” S&P stated.
The authorities on May 26 launched a Rs 3-trillion emergency credit score scheme for micro, small and midsize enterprises, to assist them tide over the pandemic’s impression. Otherwise, lending ought to stay gradual resulting from tepid demand and banks turning danger averse (regardless of ample liquidity), it stated.