Swift economic recovery will be critical to limiting loan losses faced by Indian banks in a likely protracted period of weakness in the asset-quality cycle, Fitch Rating said on Tuesday.
Indian banks face a tough operating environment in the near term, as stressed loans and write-offs increase as a result of the economic fallout from the coronavirus pandemic.
Fitch has revised India's (BBB-/Negative) growth forecast in the year ending March 2021 (FY21) to (-) 10.5 per cent in September, from (-) 5 per cent previously, partly to reflect the 23.9 per cent YoY decline in real GDP in 2Q20 associated with the impact of the pandemic.
The agency expects growth to rebound to 11 per cent in FY22, but there are downside risks.
"Limited room for fiscal support, fragilities in the financial system and a continued rise in Covid-19 cases are hampering a normalisation in activity, and Fitch does not expect GDP to return to pre-pandemic levels until 1Q22," the ratings agency said.
Besides, it pointed out that banks have been permitted by the Reserve Bank of India (RBI) to undertake a one-time restructuring exercise of loans affected by the pandemic, which will provide relief in terms of bad loan recognition and provisioning.
"However, the exercise could leave the sector saddled with a high bad-loan burden over the next few years if restructured loans do not perform according to agreed milestones," the agency said.