The agency expects growth to rebound to 11 per cent in FY22, but there are downside risks.
Indian banks face a tough operating environment in the near term. (Photo: Getty)
Swift economic recovery will be critical to limiting loan losses faced by Indian banks in a likely protracted period of weakness in the asset-quality cycle, Fitch Rating said on Tuesday.
Indian banks face a tough operating environment in the near term, as stressed loans and write-offs increase as a result of the economic fallout from the coronavirus pandemic.
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Fitch has revised India’s (BBB-/Negative) growth forecast in the year ending March 2021 (FY21) to (-) 10.5 per cent in September, from (-) 5 per cent previously, partly to reflect the 23.9 per cent YoY decline in real GDP in 2Q20 associated with the impact of the pandemic.
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The agency expects growth to rebound to 11 per cent in FY22, but there are downside risks.
“Limited room for fiscal support, fragilities in the financial system and a continued rise in Covid-19 cases are hampering a normalisation in activity, and Fitch does not expect GDP to return to pre-pandemic levels until 1Q22,” the ratings agency said.
Besides, it pointed out that banks have been permitted by the Reserve Bank of India (RBI) to undertake a one-time restructuring exercise of loans affected by the pandemic, which will provide relief in terms of bad loan recognition and provisioning.
“However, the exercise could leave the sector saddled with a high bad-loan burden over the next few years if restructured loans do not perform according to agreed milestones,” the agency said.
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