With the global recession unavoidable this year as the novel COVID-19 virus creates havoc across the planet, governments across all nations, along with the apex banks and financial sectors, have had to come up with extraordinary measures to get back some decent economic semblance.
Over the last few months, the virus has spread exponentially. This has led to impacting world economies and disrupting GDP growth worldwide. Experts suggest this will take some time to get back to normalcy again. Though the stock market will recover fast, the impact on the financial sector, just like any other sector, is severe with three distinct outcomes.
– In the short run, banks and financial institutions need to worry that their customers will be unable to access data and service points, SMEs and corporate customers will be looking at scaling down operations, while the retail customer might default on payments.
– In the medium term, the sector would witness customers moving towards the online platform, and digital channels with reduced demands from corporate customers, more loan defaults, and an increasing preference amongst customers to go for life insurance and health insurance policies.
– In the long term, with a full-blown pandemic, there will be unemployment issues, insolvency declarations, loss of trust in saving instruments like MFs, and changing business scenarios.
How has the virus affected the Indian financial sector?
The impact on banks and financial institutions in the country is multifaceted.
– Business continuity is one of the major challenges that banks need to come to terms with. Solvency risks are high – as per a report by McKinsey & Company, as many as 25% of MSME and SME loans can end up as defaulters, about 6% in the corporate sector and 3% in the retail sector are likely to default on their payments. This could result in a liquidity crunch in supply chains, banks, and non-banks.
– With bankruptcy and slowdown of economic growth around the corner for many companies in commercial segments like tourism, hotels, aviation, oil and gas, energy, and more, the credit quality will be impacted adversely.
– The other aspect is about institutional clients that face survival and sustenance issues post the relaxation of lockdown and restrictions.
– Since stock markets have plummeted in the last few weeks, banks and fintechs are looking at decreased valuations as a major challenge.
– The transaction volumes have been impacted drastically that has automatically resulted in the dropping of incomes in the form of fees and commissions.
– With reduced interest rates from apex banks, there is growing pressure on the net interest margins.
The Way Forward
While the government has announced major economic stimulus plans and packages, the financial sector needs to get started to take constructive measures to respond to the crisis. The positive thing is that there have been significant announcements on liquidity support and limiting NPL impact from the government. Additional measures are also being considered.
Only banks and financial institutions that have surplus capital backed by an impressive balance sheet can truly stand to emerge winners in this situation. The banks that have adopted end-to-end digitization also are going to sail over with lesser difficulties.
Some of the operational measures that need to be undertaken by the financial sector are:
- Moving towards digitized operations and reducing person-to-person dealings. The number of customers going to use the digital medium will increase like never before. Hence, banks and FIs need to focus on digitalization in a fast-tracked manner.
- Downsize and encouraging work-from-home options for employees.
- Designing and offering financial support packages to their institutional customers.
- Carry out stress-testing of each portfolio to evaluate the impact better.
- They also need to re-assess their business models and make contingency plans for such situations in the future.
- Banks and FIs need to carry out the exhaustive process of identifying their clients, industries, and sectors that are most impacted. They then need to revaluate the provisions against loan loss from these clients and sectors.
- Supporting clients that are facing negative economic growths. Banks need to come up with contingency plans to offer supportive solutions to their corporate clients. There have to be bankruptcy protection schemes to provide support with liquidity issues to MSMEs. The Reserve Bank of India could refinance these schemes.
- SIDBI could be involved in giving loans to first-time borrowers.
- For larger corporates, banks could look at the restructuring of debts. The process of raising capital can be made easier.
- The government might need to provide relief and infuse capital into certain banking institutions to deal with the liquidity crunches and strengthen their capital structure.
- Develop innovative systems that promote remote interactions with customers.
- Banks need to re-evaluate their operational and financial risk implications in the short-term, medium-term, and long-term so that they are better prepared for such uncertainties.
- They need to maintain a balance between meeting the expectations of their customers as well as the needs of their employees so that businesses can get back to normalcy soon.
- Technological investment is a must, and banks, especially the nationalized banking sector, have to revisit their policies in this context.
- Banks also need to introduce operational flexibilities so that they are better prepared for such overwhelming situations in the future.
- FIs and banks need to cut their interest rates to borrowers, backed by the RBI.
The way forward for the financial sector is not going to be an easy task. There needs to be plenty of innovation at their end so that they can handle their dual responsibilities ably – one, towards their customers and the other towards their employees. They need to remodel their operations, look at strategizing for impactful employee and customer relief plans, and at the same time, learn to sustain themselves through the pandemic. The time requires to be flexible and responsible towards the society, human resources, and of course, towards growth.