Moody's Investors Service on Thursday said loans to retail customers, especially those to low-income borrowers, will remain most affected due to the shock caused by the coronavirus pandemic.
Despite the pandemic challenges, asset quality at Indian banks has performed better than expected at the start of the outbreak, Moody's said.
"Corporate loans, in particular, have performed well because banks prior to the pandemic had largely provisioned for legacy problem loans and tightened underwriting standards," Moody's Vice President and Senior Credit Officer Srikanth Vadlamani said.
Addressing an online conference organised by Moody's and its affiliate ICRA, Vadlamani said an increase in non-performing loans in both public and private sector banks is subdued.
"We are past the worst, we are past the trough as far as corporate asset quality is concerned".
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
Although small and medium enterprise (SME) borrowers have been significantly affected by the economic shock and remain vulnerable to a reversal of the ongoing economic recovery, the government support has helped stem the degree of asset quality deterioration, Vadlamani added.
Moody's expects the retail segment -- in particular unsecured loans and loans to low-income borrowers -- will remain the most affected. Despite the provisions that banks have made for bad loans in this segment, credit costs will remain elevated compared to pre-pandemic levels -- although lower than the quarter ended December 2020.
Going forward for the year ending March 2022, we do expect the credit cost to be meaningfully lower than what it was in 2021.
While the public sector banks are not as exposed as private-sector lenders are to the retail segment, they do have exposure to vulnerable SMEs.
Consequently, Moody's expects their asset quality performance will be somewhat weaker than that of private sector banks.
According to Moody's, corporate governance also remains a key credit weakness for the public sector banks despite several positive measures in recent years, including hiring senior management from the private sector and giving bank boards more oversight and control.
The government measures to privatise public sector banks, while positive for the overall industry, are credit negative for the affected banks as the government support is an important driver of their credit profiles, Moody's said.
According to ICRA, investor appetite toward public sector banks remains weak, as reflected in muted participation at several such banks' capital-raising exercises over the past year.
"However, the Indian government's proposed USD 2.7 billion capital infusion should enable the banks to meet capital requirements and underpin 4-5 percent credit growth for the fiscal year ending March 31, 2022," ICRA Group Head of Financial Sector Ratings Karthik Srinivasan said.ICRA expects distressed assets at NBFCs to increase in the second half of fiscal 2021 and stay elevated through fiscal 2022 as several key segments, including auto and small businesses, remain vulnerable to the coronavirus shock.