The COVID-19 pandemic and its aftermath will continue to dominate the credit story for emerging markets (EMs), including India in 2021, S&P Global Ratings said in a report.
It said bank systems in its sample EMs were exposed to major sources of risk including that of likely deterioration in asset quality.
“We expect non-performing loans to continue increasing and cost of risk to stabilise at high levels as central banks start to remove regulatory forbearance measures in some of the markets where such measures were implemented and banks start recognising the full extent of asset quality deterioration.” It said overall the COVID-19-related economic shock would be a profitability event with those EM banking systems still showing positive net results in 2020-2021. But a few banks will report losses due to their higher exposure to the hardest hit sectors.
It said profitability of banks in EMs was likely to remain below historical levels due to lower global interest rates and slower growth. “We expect exposures to small and medium enterprises (SMEs) will drive asset-quality deterioration, particularly for countries like Turkey, South Africa, India, China, Indonesia, and Thailand,” it said.
“Tourism and export-oriented SMEs are more vulnerable in this challenging environment,” it added
“In India, SMEs [accounted] for around 20% of total exposures at mid-2020. Stress in SMEs is somewhat tempered by the government's guarantee of new loans taken by SMEs,” up to 20% of their total loans, it said.
The real estate sector (including commercial real estate) is another source of risk for EM banks, S&P said.
“Although immediate risk appears manageable, the uncertainty and potential long-term impact from the pandemic might bring structural changes to the commercial real estate segment via shifts in consumer preferences towards online shopping, more flexible work arrangements, and cost-cutting measures from consumer-driven businesses,” it said adding “That said, Indian banks' exposure to this sector is relatively lower than their EM counterparts'.”
S&P said the central banks in developed markets were likely to keep exceptionally accommodative monetary policy. For emerging markets — with some key exceptions — this should translate into a stronger economic recovery and favourable financing conditions.
“That said, risks related to vaccine distribution and a spike in COVID-19 cases remain acute for emerging markets, and this may delay the economic rebound and increase risks for their banking systems,” it said.
The other two main risks to the EM banking systems include the volatile geopolitical environment and, in some cases, domestic policy uncertainty and the vulnerability to abrupt movements in capital flows for some banks in EMs.