Indian banks' improved performance for the financial year ended March 2021 (FY21) is in contrast to the stress evident from extension of COVID-19-related relief measures to borrowers, Fitch Ratings has said.
The average impaired-loan ratio declined to 7.5 per cent by FYE21 from 8.5 per cent at FYE20. This was driven partly by deferred recognition of asset-quality strains which has masked the stress. Treasury gains also contributed to the resilience of income.
"However, within the overall stronger system outcome, it is notable that private banks' performance was considerably better than that of state banks," said Duncan Innes-Ker, Senior Director at Fitch.
The challenges faced by vulnerable sectors of the economy -- and to bank asset quality -- were underscored by the more virulent second wave of infections in 1Q FY22. Fitch revised down its real GDP growth outlook for FY22 to 10 per cent from 12.8 per cent following the surge.
Innes-Ker said the operating environment remains challenging for banks with limited opportunities for business and revenue growth. State banks are also hampered by their weaker capitalisation, constraining their ability to lend.
Problems could escalate in the event that successive COVID-19 waves and lockdowns prevent a meaningful economic recovery, considering that India's full vaccination rate is still quite low, albeit gradually improving.
Fitch said the extended relief will help banks to manage near-term balance-sheet pressures -- as it did in FY21 -- but there are also risks to banks' capital and earnings buffers from a protracted asset-quality cycle.
"We believe state banks are more at risk, given their average common equity tier 1 capital ratio is around 600 basis points lower than that of private banks, while private banks' average return on assets is four times higher than state banks."
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