Coronavirus impact to bring more worries for Indian banks: Fitch

The coronavirus-related worries are likely to aggravate difficulties for Indian banks, ratings agency Fitch said on Thursday, revising down the operating environment score for the critical sector by a notch.

The score has been revised to BB from BB+ earlier, the agency said, pointing out that COVID-19 outbreak ups the worries for the sector, which is already reeling under weak business and consumer confidence.

The outlook on the score is negative, given the uncertainty surrounding the severity and duration of the pandemic, and the associated effects on India's banks of restrictions on economic activity, it said.

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The operating environment score was last revised down in 2019 due to the weakness in business and consumer confidence, it said.

The lockdown will impact industrial production and domestic demand, it said, adding that it will exacerbate the economic slowdown of the past few quarters that was partly caused by weaker credit availability from non-bank lenders from September 2018.

It, however, said the closed nature will help restrict the impact on economic growth in India as compared with Asian peers.

The agency said Indian banking system is under-capitalised and continues to be saddled with bad loans, despite some successes.

We believe recent developments will add to these issues and slow the resolution process. It will further test the underwriting standards of those banks that expanded the fastest in recent years, including the private-sector banks, as the sharp disruption in economic activity will lead to worsening asset quality, it explained.

From a banking perspective, travel, which forms 2.2 percent of all loans, and small business lending that accounts for 5.4 percent, will be the hardest hit, along with sectors such as auto that depend on inputs from China.

It also warned that the retail segment, especially the unsecured ones, may face headwinds as unemployment rises.

It said Indian banks' Issuer Default Ratings will face downward rating pressure in the near term as they are based on support from the India sovereign and are at their Support Ratings Floors.

But banks like Axis Bank and ICICI Bank, whose viability ratings are above the mid-point score for the system, are susceptible to downward pressure on viability ratings, it said.

It acknowledged that both the private sector lenders have better income and capital buffers.

(Edited by Kanishk Singh)