Indian banks will face systemic risk as the country weathers the aftermath of the second wave of COVID and bad loans are likely to remain elevated for a time, S&P Global Ratings said in a recent report.

“Lenders struggled with a high level of weak loans long before the pandemic broke out, and clearly conditions have deteriorated,” S&P said in the report, saying it expects the second wave to hurt the performance of financial insights. indias in the first semester. of fiscal year 2022, and much relies on the effectiveness of government action to address this issue.

Weak banking sector loans are likely to remain elevated at 11-12 percent of gross loans over the next 12 to 18 months, according to the report. Credit losses are also expected to remain high at 2.2 percent before recovering to 1.8 percent in fiscal 2023, it said.

“The second wave has had a head-on weakness in asset quality,” said S&P Global Ratings credit analyst Deepali Seth Chhabria. “Financial institutions face a tense first half amid weak collections and poor disbursements.”

The government recently announced its support to the microfinance and tourism sectors that should help struggling borrowers. This support is in addition to recent loan guarantees to small and medium-sized enterprises (SMEs).

“A resurgence of COVID involving new and potentially aggressive variants, and a vaccine launch that exceeds our current expectations, remain the main downside risks. Limited vaccine supplies and people’s reluctance to take doses have slowed the nation’s vaccination program, ”S&P noted.

He said that full vaccination of about 70 percent of the country will likely take at least until the first half of 2022. This leaves the economic recovery highly vulnerable to COVID setbacks, particularly if new outbreaks trigger new lockdowns.

The report added that the current recovery would be less pronounced than the rebound that occurred in late 2020 and early 2021. “Households are depleting savings. The desire to rebuild your cash can delay spending even as the economy reopens. While we expect real GDP growth of 9.5 percent in fiscal 2022, this is off a low base, ”S&P said.

Banks have a lot to digest in the next quarter. Disbursements slowed considerably in April and May. “The credit granted by the banks fell by around 1 percent in the first two months of this fiscal year. The drop was largely seasonal – there were similar drops in the same period for fiscal years 2018 and 2019. That said, stresses on finance companies may go beyond this seasonal effect, ”the report said.

For example, Bajaj Finance Ltd. in its mid-quarter update said that sales volumes for its consumer durables and auto finance businesses in May were only 40 percent of what management expected.

S&P said that the collection efficiency of several finance companies had fallen as much as 5 to 15 percent in April and May, largely due to closures. In general, lenders serving top-notch borrowers were less affected. SME borrowers, who comprise about 17 percent of total loans, and low-income households have been hit the hardest, according to the report.

The sectors related to tourism and recreation, commercial real estate and unsecured retail loans are expected to contribute to increasing NPLs. However, the exposure of the banking system to many of these segments is moderate and should have a limited effect. Home financing (excluding affordable housing) and gold loans will likely be less affected compared to financing for micro-businesses or commercial vehicles, according to S&P. Finance companies will likely be hit harder than banks, he said.

Recently, the government added Rs 1.5 trillion to the Emergency Credit Lien Guarantee Program (ECLGS) program. This is in addition to its existing INR 3 trillion program extended to SMEs and the partial guarantee scheme for finance companies. S&P believes that these measures together should ease tensions in the country’s banking system.

The government has also announced a Rs 75 billion credit guarantee scheme for new loans from banks to microfinance borrowers through microfinance institutions. The government will guarantee up to 75 percent of these loans. “Although the plan will add liquidity, some of the affected borrowers may find it difficult to pay off their accumulated debt. This, coupled with a second restructuring scheme to address disruptions caused by the second wave of COVID, should push back the banks’ NPL recognition. The volume of restructured loans is likely to increase. “S&P said.