Moody’s says COVID second wave could hurt lenders

COVID second wave

COVID second wave : Global rating agency, Moody’s Investors Service on August 26 said the second wave of Covid will lead to new problem loans in the retail and SME segments, but a severe asset quality decline is unlikely

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The improved profitability, capital and loss buffers of banks will help them absorb anticipated loan losses and maintain credit strength, Moody’s said in a release.

“A severe deterioration of banks asset quality is unlikely, despite an expected rise in new loan impairments particularly among individuals and small businesses that were hit hardest by the virus outbreak,” said Alka Anbarasu, a Moody’s Vice President and Senior Credit Officer.

“This is because government initiatives like the emergency credit linked guarantee scheme (ECLGS) have been effective in providing immediate liquidity for businesses,” Anbarasu said.

In addition, accommodative interest rates and loan restructuring schemes will continue to mitigate asset risks, such that the coronavirus resurgence will delay but not derail the improvements in banks’ balance sheets that had begun before the pandemic, Moody’s said.

According to Moody’s, the non-performing loans (NPLs) will increase more quickly than during the first wave because new lockdowns to contain the resurgence of the coronavirus will further erode savings and earnings among many self-employed individuals and small and medium-sized enterprises (SMEs) that have already suffered financially.

“Yet economic recovery, a tightening of loan underwriting criteria initiated prior to the pandemic and continued government support will prevent sharp increases in NPLs. As a result, the resurgence in coronavirus cases will delay but not significantly derail improvements in banks’ balance sheets that had begun a few years prior to the pandemic,” Moody’s said.

However, the need to tackle new problem loans caused by the pandemic will prolong banks’ efforts to clean up legacy NPLs, the agency said.

Higher buffers to help

Moody’s said an improved buffer will help banks withstand asset quality deterioration.

Loss-absorbing buffers at most rated banks have strengthened in the past year as a result of increases in capital and loan-loss reserves, coupled with improvements in profitability. This will enable banks to withstand the anticipated deterioration of asset quality and maintain their credit strength, Moody’s said

“For public sector banks, our baseline expectation is that newly formed NPLs will increase nearly 50% in the next two years, but banks’ average NPL ratio will still edge down by the end of March 2023, largely a result of the resolution of legacy NPLs and an acceleration of credit growth, which will offset increases in new NPLs,” Moody’s said.

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