Fitch Ratings on Monday said the shock to economic activity from the latest wave of COVID-19 pandemic will be less severe than the one in 2020, but recovery is likely to be delayed as economic activity dropped in April-May.
The global rating agency said there are growing indications that the latest wave of COVID-19 infections will add to risks among financial institutions (FIs) and anticipates that the Reserve Bank of India (RBI) may introduce additional measures to support the financial sector if indications of economic stress mount.
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"We expect the shock to economic activity from the latest wave of the pandemic in India to be less severe than in 2020, even though caseloads and fatalities are much higher... Nonetheless, indicators show activity dropped in April-May, which is likely to delay the country's recovery, and the number of newly recorded cases remains extremely high," Fitch Ratings said in a report.
It said currently authorities are implementing lockdowns more narrowly, and companies and individuals have adjusted behaviour in ways that cushion the effects.
"There is a risk that disruption could persist longer and spread further than our baseline case assumes, particularly if lockdowns are introduced in more regions, or nationwide," it added.
India is facing the world's worst outbreak of COVID-19 cases with more than 3 lakh new daily COVID-19 cases being reported for two weeks now and the new cases reached more than 4 lakh new daily cases over the weekend.
Over 2.46 lakh people in India have died from the virus infection. Public health system is buckling under the weight of surging infections and deaths with several parts of the country reporting shortage of hospital beds, medical oxygen, medicines and vaccines.
"India's slow pace of vaccination means that the country could remain vulnerable to further waves of the pandemic even once the current surge subsides. Just 9.4 percent of the population had received at least one vaccine dose as of 5 May, according to figures from Our World in Data," it added.
Fitch had last month said that the surge in COVID-19 cases could add to headwinds facing India's banks and non-bank financial institutions (NBFIs) if it led to a resurgence in asset quality pressures. The latest data suggest that this risk is mounting, the agency said.
"There are growing indications that India's latest wave of COVID-19 infections will add to risks among FIs by sapping near-term momentum from the economic recovery," it said.
The measures announced by RBI on May 5 will provide some relief to financial institutions in the next 12-24 months, but largely at the expense of postponing the recognition and resolution of underlying asset-quality problems.
Among the RBI's measures, the reintroduction of a restructuring scheme for individuals, small businesses and MSMEs (micro, small and medium-sized enterprises) may be significant for financial institutions.
It covers those which have not previously taken up restructuring, but also allows flexibility to extend the period of moratorium and/or the residual tenor by up to two years for previously restructured amounts.
The scheme, available end-September 2021, may provide borrowers with additional time to resolve repayment stresses and allow financial institutions to spread credit costs over a longer period and the take-up under the last scheme, which ran to March 2021, was modest.
"However, the economy at the time was posting a strong post-lockdown recovery. Since then, we believe risks to small businesses have risen, particularly as many would have balance sheets that have weakened since 2020. Meanwhile, many individuals face medical bills that will add to strains on their income and savings," Fitch added.
RBI has also allowed funding by small finance banks to smaller microfinance institutions (MFIs) for on-lending to be classified as priority-sector lending. This could support liquidity among those MFIs, some of whom have concentrated regional exposures that increase the risk of collection shortfalls as the virus spreads into India's hinterlands this time around.
"We anticipate that the RBI may introduce additional measures to support the financial sector if indications of economic stress mount, such as credit guarantee schemes or a blanket moratorium like the one that ran from March-August 2020. The last moratorium led to sharp drops in collection rates for many NBFIs, and any such announcement would be assessed against corresponding industry support to determine its rating impact," Fitch added.
Fitch Ratings last month had said that the resurgence of COVID-19 infections may delay India's economic recovery but won't derail it, as it kept the sovereign rating unchanged at 'BBB-' with a negative outlook.
It projected a 12.8 percent recovery in GDP in the fiscal year ending March 2022 (FY22). Indian economy is estimated to have contracted 8 percent in the last fiscal, which ended March 2021.Follow our full coverage of the coronavirus pandemic here.