The bad loans of Indian banks are likely to peak after financial year 2022-23 as the regulatory relief measures amidst the COVID-19 pandemic have postponed underlying asset quality issues for now, Fitch Ratings said. Saying the bad loans ratio of Indian banks at 7.5 per cent in FY21 was moderately better than its expectations, Fitch said it was supported by declining fresh bad loans as well as high levels of write-offs. "Continued relief measures aimed at COVID-19 affected segments (such as micro, small and medium enterprises (MSME), retail and contact services) played a crucial role in deferring recognition of problems with asset quality," the rating agency said in a report titled "Indian Banks 2021 Report Card". The considerably-better performance of private banks than state banks has positively influenced banking system aggregates in addition to deferred recognition of stressed assets that has masked the stress. The improved performance of banks in FY21 is in contrast to the stress evident from the extension of COVID-19 related relief measures to borrowers, it said.
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"The operating environment remains challenging for the banks with limited opportunities for business and revenue growth. Problems could escalate in the event that successive COVID-19 waves and lockdowns prevent a meaningful economic recovery considering that India's full vaccination rate is still quite low," it said.
Fitch expects banks to manage the near-term balance sheet pressures on the extended relief, as they did in FY21, but there are also risks to their capital and earnings buffers from a protracted asset-quality cycle. State banks are more at risk given their average common equity tier 1 is around 600 basis points lower than that of private banks, while the latter's average return on assets is four times higher than state banks, it added.
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