Fitch Ratings, one of the top two credit rating agencies, said it expects the economic impact of the second wave of COVID-19 in India to be less severe than what was seen in the first wave last year.
“We expect the shock to economic activity from the latest wave of the pandemic in India to be less severe than in 2020, even though caseloads and fatalities are much higher. The authorities are implementing lockdowns more narrowly, and companies and individuals have adjusted behaviour in ways that cushion the effects,” the ratings agency said in an update issued today.
At the same time, said Fitch Ratings, the ongoing spike in cases will definitely have an impact on the economy, which had barely started the recovery process after being crushed by a punishing lock-down during the first wave in 2020.
“..indicators show activity dropped in April-May, which is likely to delay the country’s recovery, and the number of newly recorded cases remains extremely high. There is a risk that disruption could persist longer and spread further than our baseline case assumes, particularly if lockdowns are introduced in more regions, or nationwide,” it said.
Moreover, said Fitch, the country faces risk of fresh waves of COVID-19 even after the current wave subsides.
“India’s slow pace of vaccination means that the country could remain vulnerable to further waves of the pandemic even once the current surge subsides,” Fitch Ratings said, pointing out that less than 10% of India’s population has received at least one dose of COVID-19 vaccine.
In comparison to India’s relaxed attitude to vaccination — a direct fallout of the extremely mild first wave in the country — countries that were hit hard by the first wave pre-ordered tens of millions of vaccines from companies even before the shots had been cleared for use.
This has resulted in a situation in which countries like the US and the UK have given at least one dose of a COVID-19 vaccine to at least 70% of their adult population, while countries like India are faced with an extreme short supply of vaccines.
Besides affecting the process of economic recovery, Fitch Ratings said, the second wave will also hurt India’s banking and financial sector as borrowers find it harder to make timely repayments.
“We argued in April that the surge in Covid-19 cases could add to headwinds facing India’s banks and non-bank financial institutions (NBFIs) if it led to a resurgence in asset quality pressures. The latest data suggest that this risk is mounting,” it said.
At the same time, the measures announced by Reserve Bank of India (RBI) on 5 May will provide some relief to financial institutions in the next 12-24 months, “but largely at the expense of postponing the recognition and resolution of underlying asset-quality problems”, added the credit rating agency.
Among the RBI’s measures, the reintroduction of a restructuring scheme for individuals, small businesses and MSMEs (micro, small and medium-sized enterprises) may be significant for FIs, Fitch Ratings said.
“It covers those which have not previously taken up restructuring, but also allows flexibility to extend the period of moratorium and/or the residual tenor by up to two years for previously restructured amounts.”
The scheme, which runs until end-September 2021, may provide borrowers with additional time to resolve repayment stresses and allow financial institutions to spread credit costs over a longer period. Take-up under the last scheme, which ran to March 2021, was modest.
“However, the economy at the time was posting a strong post-lockdown recovery. Since then, we believe risks to small businesses have risen, particularly as many would have balance sheets that have weakened since 2020. Meanwhile, many individuals face medical bills that will add to strains on their income and savings.”
The RBI has also allowed funding by small finance banks to smaller microfinance institutions (MFIs) for on-lending to be classified as priority-sector lending.
“This could support liquidity among those MFIs, some of whom have concentrated regional exposures that increase the risk of collection shortfalls as the virus spreads into India’s hinterlands this time around.”
Fitch said there is a chance that RBI may introduce additional measures to support the financial sector if indications of economic stress mount, such as credit guarantee schemes or a blanket moratorium like the one that ran from March-August 2020.
“The last moratorium led to sharp drops in collection rates for many NBFIs, and any such announcement would be assessed against corresponding industry support to determine its rating impact.”