Covid-19: Asset quality woes to rise amid slowing credit growth, says Icra

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March 26, 2020 3:45 AM

Rating agency Icra has estimated that bank credit growth will hit a multi-decadal low of 5-6% for FY20, while asset quality issues are likely to resurface in a slowing economy, amid the Covid-19 pandemic.

Credit, coronavirus, credit risk, SGX, Globalisation, Global warming, investment decisionsThe rating agency said that a sharp downturn is expected in the manufacturing and service sectors, particularly those involved in the domestic discretionary activities.

Rating agency Icra on Wednesday estimated that bank credit growth will hit a multi-decadal low of 5-6% for FY20, while asset quality issues are likely to resurface in a slowing economy, amid the Covid-19 pandemic. The rating agency said that a sharp downturn is expected in the manufacturing and service sectors, particularly those involved in the domestic discretionary activities, such as travel, tourism, recreation, labour-intensive sectors such as construction and transport, and exports from March onwards.

With some large companies involved in production of discretionary items announcing shutdowns, the SME sector as well as unorganised sector is likely to be adversely impacted. In addition to a severe demand slowdown, many sectors could witness disruptions in payments and an elongation of the receivables cycle, along with the emergence of contractual disputes, all of which would strain the liquidity situation, and may lead to a rise in delays in servicing debt obligations unless forbearance is extended,” the agency said.

Further, job losses, especially of contractual employees in manufacturing as well as retail sectors, may rise. The loss of incomes may result in constrained consumption, some rise in defaults on personal loans, and could emerge as a risk for microfinance institutions, especially in the urban areas, the agency said.

Icra pointed out that if the repayment moratorium is provided by the Reserve Bank of India (RBI), it could assuage the reported asset quality indicators even as the inherent stress will build up. The agency said that while interest rate cuts may be forthcoming, credit supply issues need to be addressed.

Meanwhile, a steady deposit growth has driven liquidity in the banking system, with over `3 lakh-crore parked under reverse repo with the RBI for the past six months, the firm said.

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