"The outlook on the operating environment is 'negative' due to the uncertainty surrounding the severity and duration of the pandemic and the associated effects on India's banks of restrictions on economic activity," it said in a note on Thursday.
Fitch said the banking sector remains under-capitalised and saddled with bad loans. The resolution of stressed loans, which had seen progress, may slow down. In addition, underwriting standards of banks that expanded the fastest in recent years, including the private banks, will be further tested because the sharp disruption in economic activity will lead to worsening asset quality. "Steps by the Reserve Bank of India have thus far focused on shoring up liquidity in the banking system and ensuring currency stability, but Fitch believes there will be additional measures from the authorities to mitigate the impact of the outbreak," it said.
According to the rating agency, the 21-day lockdown will affect industrial production and domestic demand, and eventually will exacerbate the economic slowdown. Fitch also slashed GDP growth forecast for 2020-21 (Apr-Mar) to 5.1% from 5.6% estimated earlier. Other than risks to loans given to sectors such as travel, and micro, small and medium enterprises, the impact may also spillover into banks' retail loans, particularly unsecured credit. Sectors such as auto, pharmaceuticals and electronics, which are dependent on China for supplies, may also get affected.
