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The COVID-19 disruption has brought a fresh slew of challenges for the banking and financial services sector. Over the last two years, BFSI was impacted by the sub optimal GDP growth followed by the liquidity crisis. The ongoing COVID pandemic has fanned expected decline in credit growth due to the overall economic slowdown, lockdown impact on income profile, asset quality deterioration in the medium term and increase in credit costs impacting earnings.
In the NBFC space, many business models require a complete re-look. Since cash collections were almost impossible at the beginning of the lock-down, disbursements also took a huge hit. Fear of job losses, damage to certain segments viz. tourism, recreation and related industries etc., added to asset quality woes. However, fiscal support from the government to the affected workers/businesses has offset some of the damages.
To contain the decline in growth and mitigate the adverse impact, the Government had stepped up initiatives with Rs 21 lakh crore economic package, which included RBI’s Rs 8 lakh crore worth of liquidity measures. Unveiled in five tranches, this included Rs 3.70 lakh crore support for MSMEs, Rs 75,000 crore for NBFCs and Rs 90,000 crore for power distribution companies, increased allocation for MGNREGS, tax relief to certain sections among the various measures announced. These steps though positive, addressed more of the supply side concerns while the demand side still requires attention. RBI has taken significant measures to improve liquidity, but risk aversion has ensured that financial conditions have remained tight.
There are, however, silver linings which have emerged. After demonetisation in 2016, this is the second major push towards digitisation of payment habits in India. While most banks have already moved towards technology in a big way in the past few years, the COVID-19 pandemic has forced people to stay indoors and move towards digital money payments. This will not only help in easing in newer transacting avenues but also lead the industry towards a leaner cost efficient structure.
In the current risk-off environment where valuations are getting cheaper, capital and liquidity are important and the ability of banks to not only withstand near term stress but also the follow-on impact of this funding and demand shortage will be key to watch. In this context, banks with a combination of comfortable funding, high provision coverage, limited issues in asset quality and excess capital are better placed to withstand current stress.
Retail sector viz. mortgages/ autos/ unsecured credit is likely to slowly gather pace once situation eases, given low underlying leverage with Indian consumers, easy access to credit and release of pent-up demand. A one-time loan restructuring relief will go a long way towards ensuring credit availability in this segment is not hampered. However, problems in MSME that Covid-19 imposes could take time to resolve, though the government measures will cushion some of the impacts. The MSME industry has faced headwinds from 2016 via demonetization, GST implementation and 2018 liquidity crisis to name a few. COVID-19 will add further stress to this sector, as many of these are in supply chains of larger corporations.
But the underlying important question is which sector will be amongst the first to bounce back when the economy normalises. Since financials are a proxy to a country’s economic growth, they will have to be among the first movers. In the past few years, we witnessed the listing of insurance, asset management companies which reflect the widening of the financial space in the country. The target of a $5 trillion economy cannot be achieved without a robust banking and financial services system and the present economic environment could provide the 'window of opportunity', albeit with caution.