COVID-19 second wave heightens risks for Indian banks

According to Fitch, the second wave of COVID-19 infections poses increased risks for India’s fragile economic recovery and its banks. Fitch already expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify should rising infections and follow-up measures to contain the virus further affect business and economic activity.

Fitch forecasts India’s real GDP growth at 12.8% for the financial year ending March 2022 (FY22). This incorporates expectations of a slowdown in 2Q21 due to the flare-up in new Corona Virus cases but the rising pace of infections poses renewed risks to the forecast. Over 80% of the new infections are in 6 prominent states, which combined account for roughly 45% of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely.

The operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business.