Corporate and commercial banks would be playing catalyst role to bring back economy on the revival path during the pandemic, and in facilitating an economic revival thereafter. While banks' would find it difficult to sustain lending growth during current financial year, they would be implementing Government MSME guaranteed relief scheme amounting to Rs 300,000 crore besides providing an option to eligible borrowers to avail 6 months moratorium. During this crisis period, Banks' would be taking different steps for Lending & Delinquency, Deposits Accretion & NIMs, and Operating Expenditure.
Lending & Delinquency
The complete and partial lock-down for a period of more than 135 days had brought down manufacturing activities to almost standstill, resulting into production losses besides huge slump in consumer demand. This sector has witnessed declining profitability, mass lay-offs, challenges in servicing of interest and principal, etc. The sectors within manufacturing have taken a big hit includes automobile, hotel, aviation, textiles and infrastructure, on account of unavailability of labour, lack of consumer demand and high debt burden. Pharma companies, IT services, FMCG, Utilities, Banking and Financial services have posted better than expected quarterly results for June quarter. Banks are likely to finance better performing sectors besides agriculture sector that is relatively less impacted during pandemic.
The bad loan recovery has dropped to one-thirds in the June quarter with hardly any progress in IBC cases and sale of bad loans to ARCs has dried up due to uncertainty. Banks'need to ensure that standard loans don't slip into sub-standard category as far as possible. RBI has permitted restructuring in limited categories where asset was standard as on 1st March 2020. It has also set up a restructuring committee under the leadership of K V Kamath for recommendations on parameters for restructuring of other category of loans. Banks need to maintain a balance between retail and wholesale banking when consumer demand has to revive. The loan application, credit appraisal, loan documentation should move to online processing from printed applications and manual processing. The credit costs to be kept under control by managing recoveries, wherever possible, without compromising on asset quality.
Deposit accretion and Net-Interest-Margin
The deposits of the private sector banks have seen growing either QoQ or YoY, albeit, at a lower pace than double digit growth posted by these banks in the corresponding quarter of previous year. The demand deposits have witnessed a fall during the same period for some banks due to higher outflows from current accounts for obvious reasons besides higher withdrawals from savings deposit amid pandemic. Since repo rate dropped by 115 basis points in March and May 2020, there will be cascading effect on cost of funds as well as yield on advances. 10 years GSec yield-to-maturity (YTM) hovering around 5.8% level. Empirical data indicate that low interest rates lead to squeezed NIMs which, in turn, are linked to CAR, CASA ratio, loan book, delinquency, and operating costs.
Operating Expenditure
In the absence of usual branch outlet expansion, banks' should find out innovative ways to extend customer services through branch channel, enhancing semi-urban and rural coverage, payments processing and upgrading digital migration. Relationship Managers and Customer Interfacing Officials should manage customer relationships virtually besides promoting subsidiary businesses. Therefore, judicial investment in technology, artificial intelligence, robo-advisory and paperless or less paper banking may be resorted to. Since business hours of the banks functioning during pandemic period stand reduced to 4 hours, call centre volume might witness a spike leading to additional costs. Customer handling costs are likely to go up in the short run as operating expenditure viz. employee costs, rent, electricity, stationery, etc. is likely to remain unchanged. The enhanced expenditure is going to be partially offset by variable sales and marketing costs. Enhanced digitalization would result in surging cyber security issues. Well designed training programs would provide practical input to the customer interfacing officials. Banks are likely to offset increased costs by enhancing locket rents, service charges, transaction changes, cash deposit charges, and penal charges.
Please keep watching this space for current updates on the banking industry!
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