Fitch Ratings has recently stated that it expects a moderately worse sector outlook of the Indian banks for the next fiscal beginning April 1, 2021 based on muted expectations for new business and revenue generation, and deteriorating asset quality.
The rating agency highlighted that the impact of the COVID-19 pandemic is likely to pose challenges to Indian banks’ improving financial performance once asset-quality risks manifest in the financial year ending March, 2022.
Indian banks have reported lower impaired loans and improved profitability for the 9 months ended December, 2020 due to various forbearance measures and continued large write-offs. Indian banks, mainly the state banks, remained more risk-averse than in prior years, which was reflected in their weak credit growth.
As the forbearance measures unwind, Fitch expects the Indian banks to reverse the improvements in asset quality and profitability, with state banks more vulnerable to higher stress than private banks, which have better profitability and higher contingent reserves and capitalisation.