Second wave increases risk for fragile recovery, banks: Fitch

Fitch Ratings said on Friday that the second COVID-19 wave has increased India’s fragile economic recovery and risks to its banks.

The rating agency expects a slightly worse environment for the Indian banking sector in 2021, but headwinds will intensify if infection and rising steps affect trade and economic activity to prevent the virus.

India’s active COVID-19 infection is growing at a rapid pace with over 1 lakh new infections a day in early April.

“The government’s more accommodative fiscal stance may ease some short-term growth pressures,” Fitch said. “However, inactivating India’s large population rapidly and effectively will be important to avoid repeated disruptions,” it said.

Fitch forecasts India’s GDP growth to be 12.8% for the current fiscal year and this includes expectations of a slowdown in the April-June quarter due to a flare-up in new coronovirus cases. But the increasing pace of infection poses renewed risks to prognosis.

Transition focused

“More than 80% of the new infections are in six major states, accounting for about 45% of the total banking sector lending. Any disruption in economic activity in these states would be a blow to fragile business sentiment, even as a stringent India-shutdown is unlikely in 2020, Fitch Ratings said in a statement.

Operating environment will be most challenging for banks. The second wave may prevent a sluggish recovery in consumer and corporate confidence, and further, suppress banks’ prospects for new business.

The financial results of the banks are still fully factors in the impact of the first wave and the stringent 2020 lockdown due to the pause in place.

“We consider micro, small and medium enterprises (MSME) and retail loans as the most vulnerable. Retail loans are outperforming our expectations, but renewed tensions could increase if new restrictions curb personal income and savings.

Rating agencies noted, “MSMEs, however, benefit from state-guaranteed refinance schemes, which prevent the spread of tensions.”

It said extending the MSME refinance plan to 30 June would alleviate short-term pain, but potentially add to the sector’s exposure to MSMEs, which Fitch estimated was about 8.5% of debt at the end of December.