The report also cautions that the second wave will not just "derail improvements in banks' balance sheets" but also "prolong banks' efforts to clean up legacy NPLs".
The second wave of the COVID-19 pandemic is likely to trigger a spurt in non-performing loans (NPLs), however, accommodative interest rates and loan restructuring schemes will continue to mitigate asset risks, forecasts a recently released report by Moody’s Investors Service.
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The report -- "Banks - India: Resurgence of coronavirus raises asset risks but loan-loss buffers are sufficiently strong" -- points out NPLs will increase more quickly this time than during the first wave. It says new restrictions to contain the virus "will further erode savings and earnings among many self-employed individuals and small and medium-sized enterprises (SMEs) that have already suffered financially".
The report also cautions the second wave will not just "derail improvements in banks' balance sheets but also "prolong banks' efforts to clean up legacy NPLs".
On a more positive note, the report predicts improved buffers will help banks withstand asset quality deterioration. It highlights that loss-absorbing buffers have already strengthened in the past year at most rated banks. Besides, improvements in profitability will also enable banks to withstand the "anticipated deterioration of asset quality and maintain their credit strength".
Alka Anbarasu, Moody's Vice President and Senior Credit Officer, said, "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. This is because government initiatives like the emergency credit-linked guarantee scheme (ECLGS) have been effective in providing immediate liquidity for businesses."
Earlier, an RBI report had revealed bank deposits and currency holding with the public were adversely impacted during the second wave. The report notes household savings declined during the second wave in sharp contrast with the spike in savings witnessed during the first wave. As a consequence, there was a decline in bank deposits, it says.