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Will the Indian Banking Sector Overcome the Impacts of COVID-19?

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The COVID-19 pandemic, indeed, is the third silent world war since it has disrupted normal life and upturned the modern world in no time. The virus unleashed its power on humanity without shedding blood but killed people silently and spread the fear of death. So, there is nothing wrong with equating the present situation with a world war. The whole world is still struggling to survive the pandemic. The impact of the Coronavirus on commerce and industry will give rise to bad debts, and this may severely affect their profit. It is also vital to consider how the war-like situation created by the COVID-19 has affected the Indian banking sector as a whole.

The first case of COVID-19 was reported from Wuhan, China, in December 2019. China took it lightly but realized soon that they were playing with fire. Other countries did not take the disease seriously until it attacked them. The COVID-19 pandemic has affected developed and developing countries alike. The world came to a standstill, and the situation halted the wheel of the economy. Many people lost their lives, many are under treatment, and nobody is sure if we can conquer this epidemic. It has affected all sectors of the world and caused job loss and income dropping.

Concerning the Indian banking sector, COVID-19 and subsequent lock-down affected it heavily. The Central government declared lock-down of the entire nation on 24th March, and it abruptly brought down all the commercial activities. There started a slide down of lending activities in banks. Several changes took place in the banking sector during this great lockdown. The banking hours were shortened and operated with fifty percent of employees. The banks had to ensure the social distancing of customers. The main income source of banks is interest accrued on loans and advances. However, during the lockdown period, loans showed a downward trend because people preferred to deposit whatever they could to secure their future. In turn, the banks have become liable to pay them interest. Table.1. depicts the trend.

Table 1. Banking transactions during lockdown (Variations in Rs.Cr )

Banking transactions during lockdown. Graph
Source: SBI Research Wing

There was no loan issuance to the needy sectors and no repayment by creditors during this term. To remove this standstill, the apex bank of the country recently declared a moratorium on repayment of term loans. Along with this banking, the regulator has also provided relief for interest deferment payment for working capital loans for six months. Such actions are expected to bring a new life in the banking sector. Although the banking sector appreciated the actions, they suspect that the banks will have to wait for a long time to get back their principal amount and interest.

This pandemic has changed the banking system considerably. World Health Organization has advised to make digital payment and reduce the usage of banking notes as much as possible. As per the report of the largest bank in our country (SBI), there was an increase in online banking up to20% to 35 %. It proves right the prediction of RBI that by 2021 the digital transaction will be increased by four times in the country. During this period, people came to the bank only for check clearance and depositing money. There is an increasing trend in online transactions, which is about 20% to 40 %. Thus the pandemic compelled customers to indulge in the online banking system. Digital banking is a marvelous tool of modern banking, and an increase in the digital transaction will help banks immensely to conduct their business speedily.

Currently, the banking sector is experiencing a slumber due to the pandemic, but in the near future, this disease itself may give banks more business.

Although COVID-19 has caused a heavy impact on the Indian banking sector, it may bring forth some positive outcomes in the long run. Many Indians are working abroad, and the pandemic may force some of them to return to their homeland and start their life anew. Such persons are a skilled lot, and they may think of starting their own business in India. Such persons will apply for loans to start their enterprises. It may provide the banks to double their business. This disease may also provide a large scale boom in the automobile industry because social distancing has become a norm now, and most people will shun public transporting. It may, in turn, raise the demand for two-wheelers and cars. Such demand will increase the loan graph of banks by the automobile industry and the public. Thus, although the banking sector is experiencing a slumber due to the pandemic now, in the near future, this disease itself may give banks more business.

During the 3rd phase of the countrywide lock-down, RBI brought down the repo rate to 4.4 %. Again they lowered the repo rate to 3.35 %.To ensure the liquidity, RBI has put into practice Targeted Long Term Repo Operation. Through this mechanism, banks will get a limited amount at the repo rate. This will help banks to have a smooth run. Certain banks cleverly utilized the fear of people by selling their Insurance products, and this trend may go up.

As per the RBI report, the bank’s liabilities grew by.1.47 lakh crore, and bank credit was slipped by Rs.31,562 crore during the first phase of nationwide lock-down. However, banks such as HDFC made a provision of Rs.1550 crore and ICICI Rs. 2725 crore to tide over such a situation. As per the report of various rating agencies, the Indian banking sector has to ensure capital adequacy of 1.5 lakh crore to 3.75 lakh crore in the upcoming two years. The public sector banks that depend on the government for funding would find that they are in the worst situation as there was no provision in the union budget.

Table 1.2: Decline in amount of transactions (Cr)

Decline in amount of transactions. image

Novel Coronavirus has affected the transactions in the banking sector heavily. SBI reported a 10.63% decline in their amount of transactions in the rupee term. In February, their transactions stood at 10606 crores, and in March, it came down to Rs.9533.01 crore. If such a drastic drop occurred in India’s largest public sector bank, imagine what would have happened to small players? It is pertinent to note that some private sector banks like Kotak Mahindra, IDFC, and non- banking institutions like India Bulls Housing Finance, etc. had to impose a cut on their wage bill. Such incidents indicate that financial institutions are facing a resource crunch.

If the banking sector in any nation collapses down, it means that the nation itself is crumbling. However, in India, the financial packages of RBI tend to revive the sagging economy.

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4 Comments

  1. Good effort. Keep it up. (SBI has come out with a four fold rise in its Q4 profits declared on 5 May. Surprising, right? That is how banks manage their books even in difficult times!) Links given below would be helpful to know a little more about the indian economy and our banking sector, in the post-covid days.
    ‌https://www.industrialautomationindia.in/reportitm/9649/KPMG-Report-on-Potential-Impact-of-COVID-19-on-the-Indian-Economy/research-reports
    ‌https://m.economictimes.com/industry/banking/finance/banking/banks-that-skirted-indias-bad-loans-cant-escape-lockdown/articleshow/75193266.cms

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