The Covid-19 pandemic and the subsequent lockdown has jeopardised the economies of many countries. The complete shutdown of businesses has led to a dramatic reduction in cash flow and this poses a huge threat to banking operations. In India, to mitigate this risk, the Reserve Bank of India (RBI) and the government have taken precautionary measures, viz, reducing the repo rate, reverse repo rate and cash reserve ratio.
The banks, however, are going to face a number of challenges at the micro and macro-levels in the post-Covid period.
Uncontrolled NPA growth and low NIM
RBI’s Financial Stability Report predicts that the gross NPA (non-performing assets) will rise to 9.9 per cent by September, which will be the highest among emerging economies (China’s NPA is 1.8 per cent). In addition to this, five banks are still under the Prompt Corrective Action (PCA) framework and new additions like Yes Bank have intensified the crisis.
Covid-19 has crippled our fragile economy. A pause in production and sale, and an upsurge in unemployment are bound to persist for some time. Bank assets will also erode fast. By announcing a moratorium on EMIs for three months, RBI has unwittingly thrown open the door for citizens to further default on their commitments. The MSME bad loans that were suppressed until March 2020, as per the orders of the RBI, will now increase, nullifying the good work done in the first quarter.
Robin Bhowmik
Furthermore, the Net Interest Margin (NIM) relies on internal factors like Capital Adequacy Ratio (CAR), Current and Savings Account ratio (CASA), loan book size, operating costs and external factors such as repo rate and GDP rate. All of these, except the repo rate, are on a decline. The net interest margin is expected to decrease further in the coming weeks because of two main factors – growing NPA and shrinking CASA.
Banks have sufficient funds now because of lack of credit off-take (including NBFCs) on one hand, and reduction in rates like statutory liquidity ratio (SLR) and cash reserve ratio (CRR) by the regulator on the other. This, in turn, will lead to an increased cost of deposits, while term deposit rates and CASA rates will fall. However, with the RBI driving lower reverse repo rates; banks will also need to push more retail asset business which is likely to improve in the latter part of the year.
Rise in service charges
Operating profits of banks have been plummeting for a long time in India. Now with businesses getting severely impacted, interest income is bound to take a huge hit. Limited augmentation in other areas is likely to make banks increase their locker rents, service request charges, digital transaction charges and penal charges. Be that as it may, more and more people are expected to revisit their bank accounts that were largely dormant as government grants and support will be disbursed through this channel.
Aftermath of COVID-19 EMI moratorium
RBI announced that customers have the option to defer repayment of EMIs of loans by three months to retain cash flow, if required. As a result, the loan tenure will automatically extend by three months, but will invariably lead to extra interest charges. This especially affects those customers who are at the beginning of a loan cycle since EMIs comprise heavier interest in the initial loan term. However, for those availing the moratorium, the good news is that this temporary financial relief will not impact their credit score and their loans will not be classified as non-performing assets.
Fate of differentiated banks
Only recently, new forms of banking such as Payment Banks and Small Finance Banks (SFBs) had found their feet in the financial sector. With limited offerings and a lean revenue stream, these banks were already fraught with hardships. In the wake of Covid-19, SFBs are bearing the brunt of the lockdown of their client base (vegetable vendors, carpenters, etc) on their asset quality as well as recovery.
Growth of digital banking
One visible impact of Covid-19 is the increased use of digital banking. As part of the fight against the pandemic, both banks and governments are repeatedly insisting that customers avoid physical banking. Digital solutions are in great demand and the number of online transactions may even increase in the post-Covid period due to the convenience these services offer to both the customers and banks. Digital transformation of banks will also take centre stage with an increase in investments towards deep learning-based use cases to tackle the NPA issue.
Currently, banks are entertaining only essential services at their branches. All debit cards are now active and customers are urged to use them. The RBI has even removed the charges for using ATMs and this may stay as a permanent measure. Third-party payment applications, too, have gained momentum as part of digital banking.
However, digital banking has to be improved in order to cater to the diverse customer base. All web and mobile services should be user friendly and enable communication in local and regional languages. Along with an increase in digital banking operations, there could be a surge in cyber security issues, too. The RBI has promptly created a separate wing comprising 600 officers to tackle this challenge.
Disenchantment of bank employees
There are more than 10 lakh bank employees in our country who need support and security in the form of revised wages. Unfortunately, the present situation has dampened such plans.
The legal ecosystem is hardly helping in the recovery of the NPAs. In fact, governmental agencies are using them as a pivot to run welfare schemes like MSME/MUDRA financing. This needs to be addressed immediately.
In times like these, there is a need for professional training to enhance a person’s behavioural and technical skills to keep pace with changing requirements of the sector. We have worked with a lot of banks in this regard and have seen the impact that learning and training programmes have helped both people and financial institutions.
With digitalisation and banks moving most services online, people can explore newer roles and avenues to pursue in their current or newer sectors. A well-designed training capsule can provide practical inputs to the banking fraternity enabling them to tide over the storm with ease.
The Covid-19 pandemic is unarguably a watershed event in the history of mankind that is bound to cause paradigm shifts with far-reaching effects. Banking being a pivotal industry is likely to be on the forefront of these changes. While we will truly be able to gauge the impact of these adversities only once the crisis ends, scenario planning is even more imperative now to strategically forecast, plan and manage the future of banking.
The author is chief business officer of Manipal Global Academy of BFSI.
The opinions expressed in this article are those of the author's and do not purport to reflect the opinions or views of THE WEEK
