What Is The Economic Impact On Covid Affected Indian Banks?

What Is The Economic Impact On Covid Affected Indian Banks?

The impact of Covid on banks in India has seen the worst deterioration in the quality of the asset when compared to other advanced economies around the globe. The financial stability report by the Reserve Bank of India gives a vivid idea about the Covid affected Indian banks. 

While other economies witnessed a year-on-year increase in the default rate among both retail and corporate borrowers during the quarter-4 of CY20, it has been more highlighted as there have been negative impacts of Covid-19 on banking sector in India. The Covid-19 and banking sectors in India have not got well together. 

Impact On Banking Sector Due To Covid-19 In India

Impact of Covid-19 on banking sectors in India projects that Covid-19 has entered as the block swan crisis of the century, with important macroeconomic impact both in India and globally. The major spread of Covid-19 has led to some significant fall in major indices that indicate its potential to affect the growth of GDP through Covid affected Indian banks. 

While it is expected that the credit growth due to the overall impact of Covid-19 would be negative across most sectors, the nature and degree of the impact are likely to differ depending on the extent and duration of the disruption. So the three major impacts on Covid affected Indian banks are:

  • A disruption that is short-term is likely to lead to accessibility concerns and will scale down SME/corporate customers.
  • A more extended crisis is likely to increase the preference of the customers towards digital channels and products such as insurance, in addition to defaults by corporates/SMEs.
  • A full-blown pandemic is likely to lead to an important decrease in demand from structural shifts in customer behavior, SMEs/ corporate, and transformation of employee roles and total operating model.

While actions have already been taken by the government and RBI with targeted interventions, extended disruptions can result in future initiatives that will facilitate structural changes within the industry.

5 Key Challenges Faced By Covid Affected Indian Banks

Banks are considered as the backbone of every economy so it is important for them to stay healthy financially. Or else any financial crisis can hit an economy that will lead to recession like the United States in 2008. And this scenario is very much true for developing countries like India. According to the deputy governor of the Reserve Bank of India, S S Mundra,

"The banks are the lifelines of the economy and play a catalytic role in activating and sustaining economic growth, especially in developing countries and India is no exception."

So without any further delay let us see the challenges that the Indian banking sector faces.

Asset Quality

The largest risk to India’s banks is the increase in bad loans. The flagging in the economy in the last 2 years due to the advent of the Covid-19 pandemic led to an increase in bad loans or non-performing assets (NPAs). These are those loans that are not repaid back to the banks by the borrower. They are, thus, losses for the bank. Net NPAs add up to only 2.36% of the total loans in the banking sector. This may not seem like an increased figure. However, it does not take into restructured assets which means when a borrower is not able to pay back their loan and the bank makes the loan repayment more flexible to be paid back over a broader period of time.

Capital Adequacy

One way a bank tries to make sure that it is protected from bad loans is by creating aside money as a ‘provision’. This money cannot be used for any other reasons including lending. As a result, the capital available with the banks is lower to use for its various purposes. The “Capital Adequacy Ratio” calculates the amount of capital a bank has. When this fails, the bank itself has to borrow money or use depositors’ money for the lending. This money, however, is costlier and riskier than the bank’s original capital. For instance, a depositor can withdraw his/her money any time they wish. So, a fall in the Capital to Risk Assets Ratio (CRAR) creates tension. In the last year, CRAR has decreased steadily for Covid affected Indian banks, especially for public-sector banks.

Unhedged Forex Exposure

According to Mundra,

"The wild gyrations in the forex market have the potential to inflict significant stress on the books of Indian companies who have heavily borrowed abroad."

This stress can influence their ability to pay back the debt to Indian banks. As a result, the RBI wants banks to make sure that the companies they lend to do not put themselves into unnecessary debt in dollars.

Employee And Technology

Public-sector banks are looking for more employees to retire these days. So, older, more-experienced employees are getting replaced by younger employees. This, however, happens at junior levels. As a result, there would be a digital vacuum at the center and higher level. According to the governor,

"The absence of middle management could lead to adverse impact on banks' decision making process as this segment of officers played a critical role in translating the top management's strategy into workable action plans.”.

Moreover, government owned banks need to embrace technological development to offer better services. This will also help banks to become more efficient.

Balance Sheet Management

In 2020, many banks have wanted to delay setting aside money as provisions (for future bad loans). One purpose for this is that the chief executives of banks have a short tenure, during which time they aim to post higher net profits and bring in investors. Deferring provisioning is not good in the long term. According to Mundra,

"It must be appreciated that CEOs/CMDs would come and go but the institutions are perpetual entities. The only thing which can perpetuate their existence is a stronger and healthier balance sheet."

Conclusion

The advent of the Covid-19 pandemic has shaken mostly all economies across the globe and India is no exception. But India being a developing country faces the impact more as there are other already prevailing factors. So the Covid affected Indian banks face a severe breakdown due to this pandemic.

Andrey Ivanov

Andrey Ivanov is a business and finance expert. He has analyzed the finance and business market closely and writes all his articles with utmost precision.

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