Time and again, the role of banks and the financial sector, as a whole, has been reemphasized and reiterated. They are either at the epicenter of the problem itself or instrumental in the mitigation process.

A report by WeForum points out a negative correlation between mortality rate and output, employment, and activity level of a country undergoing pandemic (based on the Spanish Flu of 1918-19). The mortality rate is a function of Non-Pharmaceutical and Pharmaceutical interventions in such a time. With the implementation of lockdowns across the country at a relatively earlier stage, India is at an advantageous position. But how long will this advantage hold is a matter of sensitivity and foresight with which decisions are taken and implemented, given the lack of adequate public health services and rollover effects of hasty economic decisions in the past which eroded GDP growth rates significantly?

As of 12 April 2020, banks and governments have been able to take certain measures to control the fledgling economy by announcing certain relief measures. The government has loosened its purse strings by announcing an Rs. 1,70,000 crore (<0.5% of GDP) relief package and by earmarking the PM CARES Fund for the cause of COVID-19. It has been able to collect Rs. 6,500 crores as a result of generous donations pouring in from celebrities, business tycoons, artists, and the general public. The Reserve Bank of India also modified the monetary policy by announcing emergency cuts in repo rate, extending moratoriums on loans and easing asset quality norms, in addition, to increase in the ways and advances limit for central (increase to Rs. 1.2 lakh crore) and state governments (increase by 30%), applicable from April 1 to Sept. 30 of FY 20-21. It also lifted the requirement of Counter-Cyclical Capital Buffer from banks for a period of one year.

The unemployment rate has touched 13.5% (as on April 12, based on the 30-day moving average). The automotive industry is in a parallel shutdown as the labor-intensive and on the assembly line nature of the job makes it difficult to give effect to operations in such a time. The startups are also having a tough time raising funds (especially from Chinese investors who invested $ 1.4 bn. last year) and justifying the investor expectations with the travel, hospitality, and luxury-based startups facing the harsh wave. The forecasts suggest that the Indian economy will grow at a rate of 2.5%, down from the earlier estimate of 5.3%.

There’s no denying the fact that a recession is imminent, therefore, the role of Central Bank, the Reserve Bank of India becomes critical. Sector and scale-specific decisions will help in ensuring a smooth flow of liquidity and stabilizing the consumer sentiment. A two-pronged approach consisting of ensuring a smooth flow of credit and funding, along with ensuring the safety of deposits and investments will be instrumental in mitigating the adverse economic effects of the flu pandemic. Reports suggest that big corporate houses like Reliance, Airtel, and TATA Steel are already planning to absorb the liquidity released by raising capital.

While rate cuts are a welcome move, they are not sufficient as there is no guarantee that banks will be able to pass on the benefit to retail lenders.

Why not print more money?
Indian economist and journalist Swaminathan S. Anklesaria Aiyar says that the scale of relief measures in such crucial times becomes important. The government is responsible for protecting people from dying of hunger and virus both. Conservatively doling out money only weakens that mission. He suggests that the government must put aside inflation worries and exploit the option of borrowing from RBI, thus calling for deficit financing. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 had stopped this practice but the presence of escape clause allows the government to resort to this measure. This escape clause was evoked in the budget of FY 2020-21 also when the fiscal deficit was raised to 3.5% from 3.0%. The picture below suggests that the US is already indulging in the rapid printing of money to deal with Coronavirus.

Sector-Wise Diagnosis of the banking sector
The smaller private banks are the firsthand victims of such a crisis as the depositors start losing confidence. Therefore, it is necessary that a concerted effort is made to ensure their survival. This becomes especially important when the NPA problem is still afresh in their balance sheets. As per the Financial Resolution and Deposit Insurance Bill (FRDI), the depositors of all banks are insured up to an amount of Rs. 1 lakhs by Deposit Insurance and Credit Guarantee Corporation (DICGC) and as far as history goes, Indian depositors have faced relatively lesser risk because of RBI’s timely resolution plans and ‘implicit sovereign guarantee’ in the bill. But after the Yes Bank and PMC fallout, depositor confidence has been shifting gears towards Public Sector Banks (PSBs).

The Non-Banking Financial Institutions (NBFIs) like the Mutual Funds, hedge funds, Non-Banking Finance Companies (NBFCs), and among those the Micro-Finance Institutions MFIs will also witness a plunge in their lending abilities. Most NBFIs borrow from banks to disburse loans to small businesses and retail borrowers by mobilizing collateral. As the lockdown severely affects the earnings of these small businesses, their loans become NPAs in the books of NBFIs, and in turn, the asset quality of banks also deteriorates discouraging them from lending. This creates a spiral wherein these NBFIs are not able to lend further while affecting the lending abilities of banks. The co-operatives self-help groups of daily wage earners and women also face the same problem, as their employment scene comes to a standstill, with layoffs making the situation worse.

”According to the data collated by Microfinance Institutions Network (MFIN) as on 31 March, total borrowings of MFIs stood at ₹53,853 crore. Of this ₹35,288 crore is from banks and ₹18,565 crores from non-banks including MUDRA, Sidbi, Nabard, and other non-banking financial companies (NBFCs), who lend to small and medium MFIs. At the end of January, total MFI credit to borrowers stood at ₹95,000 crores to ₹1 trillion.” – Livemint

RBI will be releasing funding under the targeted long-term repo operations (TLTRO), which provide liquidity to banks for 1-3 years as against the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) which meet their requirements for 1-28 days. Since the funding is limited, it is highly likely that the big banks will take away the maximum part of it.

Under its moral suasion policy, RBI issued directives allowing banks to defer interest and principal payments (EMIs) on term loans for a period of 3 months. Banks are figuring out the modalities of transmission of this move to its borrowers. There is confusion with regard to the benefactors of this moratorium scheme. State Bank of India has issued rules which exclude MFIs while Indian Banks’ Association has explicitly mentioned that it should be made available to all borrowers. As of now, SIDBI, NABARD, or MUDRA have not announced any measures to help the situation of small banks.

Customer Retention
Now, talking about banks as service providers, ensuring smooth digital journeys for customers will be essential for retention. It would test their digital preparedness and the efficacy of measures taken in the past to educate consumers about online methods. Digital and financial literacy have still not penetrated in India. Many customers of banks are unaware of the digital services as they had been visiting the branches till the last day before lockdown. Tutorial videos, regular communications, and personal assistance will help in keeping dissatisfaction away. At the same time, employee satisfaction is another facet that banks may tend to ignore, but their cooperation will matter the most at this juncture. It calls for prompt HR policies that take into account the enhanced requirements of working environments.

Apart from effective administration, banks must also assess their abilities to defer the liabilities of their existing debtors by taking into account customer segmentation, prioritization, forecasting, and integration of business and social goals. A stress-test based on the reliefs available from the RBI, their duration, budgeted forecasts can inform lending decisions.

Following matrix by Bain&Co. summarises the decision-making process that must guide banks through this time-

Thus, all the above measures taken in a holistic manner with quick implementation will protect our economy from sinking further. By holistic, the emphasis has been laid on taking care of the interests of all types of banks and all types of customers.

Written by: Bhavya Arora
(Bhavya is a Second-year student of Hansraj College pursuing B.Com(Hons) )

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