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Third wave of COVID-19 poses high risk to bank asset quality: Study

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Ratings agency ICRA said it would maintain a stable outlook for the banking sector despite the risk of the third COVID-19 wave. 

Third wave of COVID-19 poses high risk to bank asset quality: Study
Despite the improvement in the performance of banks in the second quarter of financial year 2022, the threat of the third wave of COVID-19 infections poses a high risk to their asset quality, said a study.
At present, standard restructured loans of banks are estimated to be 2.9 percent of standard advances, rating agency ICRA said in a report.
The restructured loan book comprises borrowers who were impacted by the first and second waves of the COVID-19 pandemic. Typically, banks provide a moratorium period of 12 months to restructure loans.
As a result, the current book is likely to start exiting the moratorium from the fourth quarter of this fiscal and the first quarter of FY2023. Hence, a possible third wave of infections could disrupt the performance of the borrowers and pose a risk to the improving trend of profitability and solvency, ICRA said.
Banks will retain the credit growth estimate of 7.3-8.3 percent for the fiscal, ICRA said. Till December 4, bank credit grew at 7.4 percent in the third quarter compared to 5.5 percent in FY2021.
In financial year 2023, credit growth in banks will be 7.7-8.6 percent, with potential for higher growth if corporate demand revives in the second half of the next financial year, the ratings agency said.
Meanwhile, surplus liquidity in the banking system continues to rise, the report said. The increase in liquidity absorption under variable rate reverse repo by the Reserve Bank of India (RBI) has resulted in an increase in short-term rates. “This will pave the path for a gradual hike in policy rates next year, thereby leading to higher borrowing costs in FY2023,” ICRA said.
The ratings agency said it would maintain a stable outlook for the banking sector despite the risk of the third wave looming on it on expectations of improvement in asset quality, profitability and capital cushions.
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