Global brokerage Nomura lowered its growth expectations for India from 13.5 percent to 12.6 percent in this year, reflected the pandemic drag on the economy and marginally lower retail inflation - Photo by Indian Prime Minister Office

JAKARTA (TheInsiderStories) – Global brokerage Nomura lowered its growth expectations for India from 13.5 percent to 12.6 percent in this year, reflected the pandemic drag on the economy and marginally lower retail inflation. The report released on Friday (04/09), also revised its gross domestic product (GDP) growth projection to 11.5 percent for the ongoing calendar year from before at 12.4 percent.

While, Fitch Ratings sees, India’ second wave of COVID-19 infections poses increased risks for the fragile economic recovery and its banks. The agency already expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify should rising infections and follow-up measures to contain the virus further affect business and economic activity.

The country’ active COVID-19 infections have been increasing at a rapid pace. The new infections exceeded 100,000 a day in early April 2021, against 9,300 in mid-February 2021. Fitch forecasts the real GDP growth at 12.8 percent for the financial year ending March 2022.

This incorporates expectations of a slowdown in second quarter (2Q) of 2021 due to the flareup in new coronavirus cases but the rising pace of infections poses renewed risks to the forecast. Over 80 percent of the new infections are in six prominent states, which combined account for roughly 45 percent of total banking sector loans.

Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely, said Fitch. The operating environment for banks will most likely remain challenging against this backdrop.

This second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business. There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’ impact and the stringent 2020 lockdown due to the forbearances in place.

“We consider the micro, small and medium enterprises and retail loans to be most at risk. Retail loans have been performing better than our expectations but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring,” wrote the report.

Private banks are more exposed to retail but also have much better earnings capacity, contingency reserves 1.2 percent of loans) and core capitalization at 15.9 percent to withstand stress on their portfolios. In contrast, state-owned banks remain more vulnerable as their prevailing weak asset quality and greater participation in relief measures are not commensurate with their limited loss-absorption buffers.

The extension of the MSME refinancing scheme until 30 June 2021 will alleviate short-term pain, but potentially add to the sector’s exposure to stressed MSMEs, which was around 8.5 percent of loans in nine months (9M) of 2021 as per Fitch’ estimate. Nevertheless, they believe the second wave could have a more modest impact than the initial wave on our assessment of the operating environment in India, based on global examples of residents and economies adjusting their activities, including much less stringent and more localized restrictions than last year.

The government’ more accommodative fiscal stance may also mitigate some short-term growth pressures. However, inoculating its large population in a fast and effective way will be important to avoid repeated disruptions. Fitch lowered the operating environment score for Indian banks to ‘bb’ in March 2020, with a negative outlook.

Particularly those in the ‘bb’ category – would rise if Fitch assesses that operating environment risks have increased enough to warrant a lower score. However, the banks’ support-driven Issuer Default Ratings are unlikely to change unless the state‘ ability or propensity to support the banks has changed.

“Fitch believes that a speedy economic recovery is critical for the sector to rebound, even though we expect a challenging landscape for Indian banks in 2021,” concluded the report.

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