Indian banks face systemic risk

New Delhi: S&P Global Ratings on Wednesday said Indian banks face a systemic risk as the second Covid wave will impair the performance of financial institutions in the April-September period.

Stating that economic recovery remains highly vulnerable to setbacks due to Covid, particularly if fresh outbreaks trigger new lockdowns, S&P said the banking sector's weak loans will likely remain elevated at 11-12 per cent of gross loans in the next 12 to 18 months. "The second wave has front-ended weakness in asset quality," said S&P Global Ratings Credit Analyst Deepali Seth Chhabria.

"Financial institutions face a strained first half amid weak collections and poor disbursements." Indian banks face systemic risk as the country sorts through the aftermath of the Covid second wave. Lenders struggled with a high level of weak loans well before the pandemic struck and clearly, conditions have deteriorated, S&P said in a statement.

The government has announced support for the microfinance and tourism sectors that should help struggling borrowers. This support comes on top of the recently extended loan guarantees to Small and Mid-size Enterprises (SMEs). S&P said it expects the second wave to impair the performance of Indian financial institutions in the first half of fiscal year 2022, with much resting on the effectiveness of government measures to address this problem.