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S&P Global Ratings, on June 30, said that the COVID-19 pandemic may push back the recovery of India's banking sectors by years, hitting the credit flows and eventually, the economy.
The US-based agency further stated that it expects non-performing loans will hit a fresh high, raising credit costs, and put pressure on ratings according to its report titled COVID And Indian Banks: One Step Forward, Two Steps Back.
"In our base case, we expect the non-performing loans to shoot up to 13-14 per cent of total loans in the fiscal year ending March 31, 2021, compared with an estimated 8.5 per cent in the previous fiscal year," said S&P Global Ratings credit analyst Deepali Seth-Chhabria.
It said that the estimates of these bad-debts will be revealed slowly which means that the banks may be burdened with a huge stock of bad loans next year.
"We assume only about a 100 basis point improvement in nonperforming loans in fiscal 2022," she added.
S&P Global Ratings credit analyst Geeta Chugh said the effect on finance companies will be more pronounced than on banks.
"Some finance companies lend to weaker customers and have high reliance on wholesale funding. These companies were already facing a trust deficit since the 2018 default of Infrastructure Leasing & Financial Services (IL&FS).
Finance companies also face accentuated liquidity risks due to high proportion of borrowers opting for loan moratorium," said the credit analyst.
According to the report, after years of deterioration, asset quality in the Indian Banking System had improved over the past 18 months. A good sign for the overall health of the economy, it had helped banks with higher write-offs, slower accretion of bad loans, and resolution of some big cases under the new bankruptcy law.
"Nevertheless, Indian banks were still working through a formidable overhang of non-performing assets when the COVID crisis struck. This largely derailed that rehabilitation process," S&P added.
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