Impact Assessment
There was an old saying about non-existence of black swans, until one appeared from nowhere. Black swan events are characterized as rare, impactful, of large magnitude and consequence, hard-to-predict, etc. Such events derail the financial markets including banking industry. One of the latest indicators of the major impact is contraction of US economy by a whopping 32.9% in April-June 2020 quarter. Indian GDP growth/contraction initial estimates for Q1FY20-21 are likely to be released on 31st August 2020.
Indian Banks' need to formulate short term as well as medium term strategies to cope up with the ongoing health crisis, impacting banking industry. The foremost might be capital requirement - stronger public sector banks would be able to raise capital from market subject to Government holding not falling below 51% as per extant regulations. New generation private sector banks will access capital markets for raising capital whenever needed. The 6 months moratorium option availed on loans and advances by borrowers might result in surge of delinquent assets, requiring additional bad loan provisions though banks' are keeping aside COVID-19 provision. Rating agency CRISIL has predicted rise of bad loans to 11.5% level by March 2021. There are discussions at advance stage between regulator and the Government for consideration of one time restructuring of loans.
The other major factors impacting banking industry are liquidity and risk management. Though enough of liquidity has been released by RBI (Rs 5.66 lakh till May 2020) yet sole focus of the central bank revolved around liquidity measures. The risk factors those need careful assessment include credit risks, operational and liquidity risks. Liquidity is key element of business continuity or going concern capacity of lending institutions during pandemic. The Q1FY20-21 results announced by HDFC Bank, Axis Bank, ICICI Bank, IDFC Bank, IDBI Bank and SBI have been better than expectations. However, real impact would be visible by the end of the year when moratorium payments become due.
The drop in consumer lending demand is likely to affect retail loan growth during this year whereas MSME lending could witness a normal growth due to guaranteed MSME relief package of Rs 300,000 crore announced by the Government. Banks are negotiating for reduction in rentals of existing leased premises to bring down operating expenditure; dwindling interest rates are likely to squeeze net interest margins; credit costs would surge on account of additional provisioning; demand for non-loan banking services would recoup gradually; customer trust might shift to renowned and trusted brands; consolidation/privatization of weaker banks; deposit and advances interest rates are likely to touch new lows; branch expansion exercise is likely to slowdown; and last but not least banks would adopt modern technology to enhance digitalization process. While banking sector is likely to go through unprecedented uncertainty about the economic outlook, the present environment brings in particular challenges and disruption, which could impact banking industry as a whole.
Please keep watching this space for regular updates on the current scenario in various sectors!
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