India’s banking system to be among the last to heal post pandemic, recovery could be beyond 2023

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September 24, 2020 10:10 AM

Asset quality, among Indian financial institutions, had issues prior to the pandemic, unlike other nations where the trend was improving.

COVID-19, consumer lending, consumer behaviour, digital banking industry, fintech industry, UPI-based payments, mobile-based lendingS&P Global said that their base case for recovery assumes economic rebound in 2021 following the release of a vaccine for the coronavirus in the middle of the year.

With the coronavirus taking a toll on the already stressed lenders, rating agency S&P Global has said that India’s banking sector could be among the last to recover post the pandemic. In a recent report, S&P Global said that it anticipates difficulty in restoring financial strength ratings of financial institutions to pre-crisis levels. “We don’t expect the world’s largest banking sectors, including more than half of G20’s, to recover to pre-COVID-19 levels until 2023, or beyond,” it said. India will be joined by Mexico and South Africa among the banking systems to be the slowest to recover to 2019 levels. 

S&P Global rating noted that India was already suffering with an overhang of high non-performing assets (NPA) as it entered into the pandemic. “We have taken negative rating actions on Indian banks and NBFIs as operating conditions have deteriorated through the crisis,” it said. The rating agency noted that India’s banking sector, although will be late-exiter from the slump, but some rations could improve faster. “The Indian banking sector is considered a late-exiter. Its recovery will be longer, but some ratios may return more quickly to pre-COVID-19 levels as they were weak prior to the onset of COVID-19 in contrast with many other jurisdictions,” S&P Global said.

Asset quality, among Indian financial institutions, had issues prior to the pandemic, unlike other nations where the trend was improving. The report adds that India’s recovery could come beyond 2023. Which would take a toll on India which is looking to capitalize on the pandemic to pose itself as an alternative for manufacturing for global supply chains. S&P Global has classified late-exiters on the basis as jurisdictions where COVID-19 and other stresses have already had a meaningful negative effect. “That is, Banking Industry Country Risk Assessments (BICRA) have already been negatively revised. Potential recovery to pre-COVID-19 status is considered furthest, and timing is less certain after the onset of COVID-19,” the rating agency said.

Further, S&P Global said that their base case for recovery assumes economic rebound in 2021 following the release of a vaccine for the coronavirus in the middle of the year. However, it does anticipate a lag between when an economic recovery takes hold and when the credit strength of banks stabilizes. S&P Global has taken 335 negative rating actions globally since the outbreak began. Among the banking systems that it expects to be the early ones to recover include China, Canada, Singapore, Hong Kong, South Korea, and Saudi Arabia. These are expected to recover by the end of 2022. While the US, UK, Australia, France, Germany, and Russia are likely to recover not before 2023, according to S&P Global.

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