Indian banks face tough operating environment

NEW DELHI:  Indian banks face a tough operating environment as stressed loans and write-offs increase on account of the fall-out of the pandemic, said Fitch Rating on Tuesday. The rating agency says the loan pile which would build up could be offset only by a quick recovery. While the Indian economy is expected to contract this year by a negative 10.5 per cent GDP by Fitch among others, there are expectations of a sharp rebound in 2021-22.

Banks have been permitted by the Reserve Bank of India (RBI) to undertake a one-time restructuring 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,” warned the rating agency.

Fitch warned that though it has forecast a 11 per cent growth in 2021-22, there were downside risks -  limited room for fiscal support, fragile financial system and a continued rise in Covid-19 cases which is  hampering normalization. “Fitch does not expect GDP to return to pre-pandemic levels until the first quarter of 2021-2022,” report said.

RBI data shows that India’s banks wrote off nearly $ 85 billion over 2014-2019, of which state-run banks contributed nearly 80 per cent. “The economic stress this time around is set to be deeper and more broad-based, which could make restructuring more challenging. Execution risk remains high,” Fitch pointed out.
RBI has built in safeguards in terms of tighter timelines, penal provisioning and greater monitoring by an expert committee for loans beyond Rs 1,500 crore.