The loan moratorium extended by banking regulators in countries such as India and China to deal with the liquidity crunch amid the Covid-19 crisis will provide a temporary relief to borrowers, but will constrain banks from taking proactive recovery actions and could lead to an even greater build-up of credit losses once the moratoriums are lifted, according to Moody’s.

In a report on the Asia Pacific region, Moody’s on Tuesday said while policy stimulus will shore up credit quality for larger companies in certain sectors, including airline and oil and gas, Asia’s banking sector profitability will also decline from deteriorating asset quality and lower net interest margins.

“Financial regulators in China, Australia, Malaysia, India and some other Asian economies have enacted debt moratoriums to soften the liquidity crunch for businesses and households. While repayment delays will provide temporary relief to borrowers, these directives will also constrain banks’ abilities to take proactive restructuring and recovery actions. These measures also could lead to an even greater build-up of credit losses once the moratoriums are lifted,” Moody's said.

Moody’s Investors Service further said this risk will increase substantially if the economic downturn, and measures to contain the spread of the coronavirus, persist for longer than expected.

“In the event of heightened banking sector distress, Asian governments will likely stand behind larger, systemically important banks. We view government support as stable in most of the banking systems that we monitor, reflecting our expectation of extraordinary support, should it be required, to avert financial contagion,” it added.