While the shock to the economy may not be as severe as last year, risks remained of prolonged disruptions and lockdowns on account of infections spreading further than previously assumed, the firm said in a report on Monday.
“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,” Fitch said.
India reported 366,161 fresh cases in the last 24 hours, falling below the 400,000 mark for the first time in five days, along with 3,754 deaths, according to data from the health ministry.
Delhi, Haryana and Uttar Pradesh extended lockdown and other restrictions till May 17 as the daily case count remained elevated.
The fresh round of relief measures announced by the Reserve Bank of India in response to the second wave could provide some relief to finance institutions over the next 12-24 months but largely at the expense of postponing the recognition and resolution of underlying asset-quality problems, the report said.
The latest data suggested that the risk of the resurgence in cases leading to renewed asset quality pressures faced by banks and non-banking financial companies were mounting after the agency had flagged the issue last month.
Significant among the RBI’s measures was the reintroduction of the restructuring scheme for individuals, small businesses, which had not seen much traction as the economy was on a recovery path, Fitch said.
“Since then, we believe risks to small businesses have risen, particularly as many would have balance sheets that have weakened since 2020,” it said, adding that many individuals face medical bills that would add to strains on their income and savings.
Further, the central bank’s decision classifying funding by small finance banks to smaller microfinance institutions for on-lending as priority-sector lending would mitigate the increased risk of collection shortfalls for such institutions as the virus spreads into India’s hinterlands this time around, the report said.
Fitch anticipated additional relief measures from the RBI such as credit guarantee schemes or reintroduction of the blanket loan repayment moratorium if indications of economic stress mounted.
The agency flagged the lagging pace of India’s vaccination drive, with just 9.4% of the population receiving the first dose as of May 5, as it could mean that the country remained vulnerable to a third wave.
About 170 million people were vaccinated so far with 689,652 receiving the shot over the past day, official data as of Monday showed.
While reaffirming India’s sovereign credit rating as BBB- with a negative outlook, Fitch said its assessment of banks that depend on government support, such as public lenders, would be driven by the sovereign’s capacity to provide support without affecting its own ratings.