Banks see better environment as Covid-linked economic risks reduce: Fitch

India was badly affected by the pandemic, but the associated risks have now receded, Fitch said.

Fitch Ratings on August 16 said that the operating environment (OE) for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have reduced.

“A number of prudential indicators for the sector have also improved compared with the pre-pandemic levels, though a growing risk appetite in a relatively benign OE highlights the importance of appropriate buffers against potential stress,” said the rating agency.

Fitch revised its OE mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020, after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector.

India was badly affected by the pandemic, but the associated risks have now receded, Fitch said.

The sector’s average common equity Tier 1 (CET1) capital ratio rose to 13.4 percent by financial year (FY) 2022-23, from 10.4 percent in FY18. This partly reflects around Rs 5000 crore ($50 billion) in cumulative fresh equity provided by the sovereign to state banks since 2015. Earnings buffers also appear significant, with operating profits equivalent to around 2.8 percent of risk-weighted assets by our estimate in FY23, up from 0.6% in FY20,” the ratings company said.

On the regulation side, Fitch said that regulatory developments since have been mixed.

“The Reserve Bank of India (RBI) has tightened some norms, building on past measures to strengthen governance, improve board oversight and recognize stress. It has also announced plans to implement expected credit loss provisioning for banks,” Fitch said.