India's second wave of coronavirus infections poses heightened risks for the country's fragile economic recovery and its banks, Fitch Ratings said on Friday.
The global credit rating agency expects a moderately worse environment for the Indian banking sector in 2021, however headwinds would intensify, should the surging COVID-19 cases and follow-up measures to check the virus further impact business and economic activity.
India's active coronavirus cases have been rising at a breakneck pace, with new infections surpassing 1 lakh a day in early April 2021, against 9,300 in mid-February.
"The government's more accommodative fiscal stance may also mitigate some short-term growth pressures. However, inoculating India's large population in a fast and effective way will be important to avoid repeated disruptions," Fitch said.
Fitch forecasts India's GDP growth at 12.8 per cent for the current financial year ending March 2022 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.
"Over 80 per cent of the new infections are in six prominent states, which combined account for roughly 45 per cent 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," Fitch Ratings said in a statement.
The operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banks' prospects for new business.
There are also asset quality concerns since banks' financial results are yet to fully factor in the first wave's impact and the stringent 2020 lockdown due to the forbearances in place, it added.
"We 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.
"MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring," Fitch noted.
It said the extension of the MSME refinancing scheme until June 30, 2021, will alleviate short-term pain, but potentially add to the sector's exposure to stressed MSMEs, which was around 8.5 per cent of loans at the end of December, as per Fitch's estimate.
"Nevertheless, we believe the second wave could have a more modest impact than the initial wave on our assessment of the operating environment in India, based on global examples of residents and economies adjusting their activities - including much less stringent and more localised restrictions than last year," it added.
(With inputs from PTI.)