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Banks (Finance)

Indian Banks' Asset Quality Holds Up Better Than Expected Amid Coronavirus Pandemic

Strategic Insights

— 2 min read

Despite the shock caused by the coronavirus pandemic, asset quality at Indian banks has performed better than expected at the start of the outbreak. Moody's Investors Service notes that corporate loans have held up well due to banks' timely provisioning for legacy problem loans and tightened underwriting standards. However, retail segment, particularly unsecured loans and loans to low-income borrowers, will remain the most affected, with credit costs remaining elevated.

Key Takeaways:

  • Corporate loans in the Indian banking sector have performed well due to timely provisioning and tightened underwriting standards.
  • 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.
  • Government support has helped stem the degree of asset quality deterioration, particularly in the retail segment.
  • Public sector banks have exposure to vulnerable SMEs, which will lead to weaker asset quality performance compared to private sector banks.
  • Corporate governance remains a key credit weakness for public sector banks, despite recent positive measures.
  • The Indian government's proposed $2.7 billion capital infusion will enable public sector banks to meet capital requirements and underpin 4%-5% credit growth for fiscal 2022.
  • The larger private banks have proactively raised cumulative capital of INR543 billion and are better placed than public sector banks to absorb asset quality stress.
  • Distressed assets at NBFCs will increase in the second half of fiscal 2021 and stay elevated through fiscal 2022 due to the coronavirus shock.

Statistics:

  • Indian banks' corporate loans have held up well due to timely provisioning and tightened underwriting standards.
  • The retail segment, particularly unsecured loans and loans to low-income borrowers, will remain the most affected, with credit costs remaining elevated by 8.0% (pre-pandemic levels).
  • Public sector banks' asset quality performance will be somewhat weaker than that of private sector banks due to their exposure to vulnerable SMEs.
  • The Indian government's proposed $2.7 billion capital infusion will enable public sector banks to meet capital requirements and underpin 4%-5% credit growth for fiscal 2022.
  • The larger private banks have proactively raised cumulative capital of INR543 billion.
  • Distressed assets at NBFCs will increase in the second half of fiscal 2021 and stay elevated through fiscal 2022 at a rate of 7%-9%.
  • NBFCs' assets under management will grow around 7%-9% in fiscal 2022 following sluggish performance this fiscal year.

Sources:

  • Moody's Investors Service ("Moody's") - *Moody's: Asset quality of banks better than expected*
  • ICRA Limited ("ICRA") - *ICRA: Muted investor appetite at public sector banks means they will require capital infusions to meet capital requirements*

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