Indian banks now face less risks from corporate loans

Current performing loans can now better handle stress.

Indian banks’ risks from corporate loans have dwindled from the previous credit cycle even if asset quality risks are soaring amidst an economic contraction, reports Moody’s Investor Service.

"Corporates will not be immune from the ongoing economic contraction caused by the coronavirus outbreak. Near-term stress at corporates is already visible in the very weak performance in the quarter ending June 2020," said senior credit officer Srikanth Vadlamani.

However, current performing loans are now more equipped to handle stress as exposure to most corporates is already visible in the weak performance in the quarter ending in June, he added.

"Lending in the past few years has been concentrated among stronger companies amid an overall slowdown in capital expenditure, while banks have also become more conservative in selecting borrowers."

Loans to finance and real estate firms, which together comprise a large chunk of total bank loans, are the most vulnerable considering both sectors are facing operating cash flow problems.

Sectors most affected by the pandemic, such as transportation and hospitality, are also vulnerable, although banks' direct exposures to these borrowers are relatively small, the report concluded.