RBI's relief to postpone financial stress from Covid-19 surge: Fitch

There are growing indications that India's latest wave of Covid-19 infections will add to risks among financial institutions (FIs) by sapping near-term momentum from the economic recovery, according to Fitch Ratings.

Measures announced by the Reserve Bank of India (RBI) on May 5 will provide some relief to FIs in the next 12 to 24 months, but largely at the expense of postponing the recognition and resolution of underlying asset-quality problems.

"We expect the shock to economic activity from the latest wave of the pandemic to be less severe than in 2020 even though caseloads and fatalities are much higher, said Fitch.

The authorities are implementing lockdowns more narrowly and companies and individuals have adjusted behaviour in ways that cushion the effects, it added.

Nonetheless, indicators show activity dropped in April and May which is likely to delay the country's recovery, and the number of newly recorded cases remains extremely high.

There is a risk that disruption can persist longer and spread further than our baseline case assumes, particularly if lockdowns are introduced in more regions or nationwide.

Fitch said in April that the surge in Covid-19 cases could add to headwinds facing banks and non-bank financial institutions (NBFIs) if it led to a resurgence in asset quality pressures. The latest data suggest that this risk is mounting.

Among the RBI's measures, the reintroduction of a restructuring scheme for individuals, small businesses and MSMEs (micro, small and medium-sized enterprises) may be significant for FIs.

It covers those which have not previously taken up restructuring, but also allows flexibility to extend the period of moratorium and/or the residual tenor by up to two years for previously restructured amounts.

The scheme, which runs until September-end may provide borrowers with additional time to resolve repayment stresses and allow financial institutions to spread credit costs over a longer period. Take-up under the last scheme which ran to March was modest.

However, the economy at the time was posting a strong post-lockdown recovery.

"Since then, we believe risks to small businesses have risen, particularly as many would have balance sheets that have weakened since 2020. Meanwhile, many individuals face medical bills that will add to strains on their income and savings," said Fitch.

The RBI has also allowed funding by small finance banks to smaller microfinance institutions (MFIs) for on-lending to be classified as priority-sector lending. This can support liquidity among those MFIs, some of whom have concentrated regional exposures that increase the risk of collection shortfalls as the virus spreads into India's hinterlands this time around.

Fitch anticipates that the RBI may introduce additional measures to support financial sector if indications of economic stress mount, such as credit guarantee schemes or a blanket moratorium like the one that ran from March to August 2020.

The last moratorium led to sharp drops in collection rates for many NBFIs, and any such announcement would be assessed against corresponding industry support to determine its rating impact.

( With inputs from ANI )