Covid-19 Second Wave to Dampen Economic Recovery in India: ICRA

Rating agency ICRA cautioned that the continuing resurgence in Covid-19 cases, along with the proliferation of localized restrictions, could dampen the pace of recovery for the Indian corporate sector.

However, the percentage of the rated portfolio that would be severely impacted by the second wave would be much lower than in 2020, it said.

At the same time, the agency expects contact-intensive sectors like travel and hospitality, and retail to face severe disruptions even in the second wave, and their recovery timelines to be further pushed back by these rising infections.

"The pace of recovery would undoubtedly be arrested by the recent surge in Covid-19 infections and associated localised restrictions. The extent of the impact would take a cue from the timelines with which this spike plateaus, and then starts receding," said Ramnath Krishnan, President, Ratings, ICRA.

"While the vaccination drive has commenced, the pace of the actual roll-out of the Covid-19 vaccines to the wider adult population, introduction of additional vaccines in the Indian market, their efficacy against different variants, and the duration for which the vaccines provide enhanced immunity will also impact sentiment and growth, going forward."

Nevertheless, ICRA estimated that the impact of the second wave of the pandemic on many sectors to be lower than the first - an advantage from the less widespread and stringent lockdowns as of now vis-a-vis the prolonged nationwide lockdown last year.

"Other supportive factors include lower global disruptions, absence of pricing pressures on commodity producers, increased digitisation and availability of additional funding lines."

Besides, ICRA foresees six sectors, namely aviation; hotels, restaurants and tourism; media and entertainment-exhibitors; microfinance institutions; real estate-retail; and retail, to be at high risk from the second pandemic wave, but much lower than in 2020.

Furthermore, it expects the percentage of ICRA-rated portfolios that would be severely impacted by the second wave to be limited to 4 per cent much lower than the 17 per cent seen last year.

The agency pointed out that risk aversion among lenders could pose a challenge to credit growth, which the ratings agency projects at 7.3-8.3 per cent and 7-9 per cent respectively, for banks and non-banks for FY2022.

ICRA also expects asset quality pressures for lenders to rise and profitability normalisation to stretch beyond FY2022.

On the other hand, it said that banking system's solvency profile is better than the pre-Covid levels, affording it a buffer to absorb shocks.

"ICRA highlighted that the NBFCs were maintaining liquidity to cover more than three-month debt repayments since the beginning of the last fiscal."

"Considering the emerging uncertainties because of Covid-19, which could affect their near-term collections and fresh debt raise, ICRA expects the liquidity profile to be maintained with adequate buffer to give comfort to various stakeholders."

As per ICRA, heightened investor caution on the asset quality of retail loan pools, especially for microfinance and unsecured SME loan pools, is likely to reduce securitisation volumes in the near term for the NBFCs.

"ICRA cautioned that the localised restrictions have started to impede the sequential momentum in certain sectors, such as domestic airlines' passenger traffic, electricity demand, vehicle registrations and the generation of GST e-way bills, even though the year-on-year growth will be high in April 2021 because of the low base related to the lockdown in April 2020."

"ICRA expects the Indian GDP to grow by around 10-10.5 per cent in FY2022. The key downside risks to its forecast are a continuation of this wave of infections and an extension of the restrictions imposed so far, relatively severe restrictions being imposed in additional states, and the existing vaccines not being effective enough against the new variants of the virus."

Nevertheless, it cited that an earlier availability of vaccine imports, enabling a faster coverage of the vaccination drive, may offer a back-ended upside to the GDP growth in FY2022, after the disruption that may emerge in the near term.