As we enter into the sixth month of the pandemic, COVID-19 continues to take a toll on lives and the economy globally. With more than 2 lakh cases, India continues to figure in the top 10 countries that is impacted by the virus. Thanks to the continuing lockdown coupled with sluggish opening this month, economic activities in the country have come to a virtual standstill, and that has had the most adverse impact on the Indian BFSI sector.
Among the major impacts of the COVID-19 pandemic, we have witnessed the Yes Bank crisis along with the revised outlook by Moody’s rating agency for the Indian banking sector from stable to negative.
So, how has the BFSI industry been impacted by the current COVID-19 economic crisis? Let’s discuss them in detail along with how the industry is responding to them.
COVID-19 Lockdown – Its impact on India’s BFSI sector
Here’s a look at five BFSI domains that have been impacted the most by the current lockdown:
1. Non-Performing Assets (NPAs)
According to a report released by S&P Global Ratings, Indian banks are likely to see an increase in their NPA ratio by 1.9% in 2020, following the economic slowdown caused by COVID-19 pandemic. Going by the report, this can further worsen the banks’ credit cost ratios by around 130 basis points (bps).
Central banks like the Reserve Bank of India (RBI) have taken measures that include increasing liquidity, implementing rate cuts, and providing targeted loans to affected industries. By relaxing its regulations, the RBI is providing a temporary moratorium to affected individuals and companies, who will only need to start repayments from June 2020.
2. Impact on bank loans
NPAs seem to be only the tip of the iceberg. The current crisis has definitely increased the liquidity in India’s banking system with surplus cash growing to over 4 lakh crores. However, high liquidity has not encouraged fresh banking loans, as most banks continue to play it safe because of the prevailing economic uncertainty.
Additionally, banks in India could see a major spike in bad loans as more borrowing companies begin to default on their loan payments due to the lack of economic activity. RBI has already implemented multiple measures including a rate cut of 75 basis points, interest deferment on working capital, and a 3-month moratorium on all term loans – all aimed towards boosting lending.
3. Stressed assets
Although such RBI measures may boost the lending of fresh loans, banks seem to be facing the consequences of past loans as they try to deal with the growing number of bad loans in their balance sheets. Such loans have been the outcome of years of easy money lending. Defaulting cases on large corporate loans are now seeking a resolution under India’s bankruptcy code.
With reduced economic activity, banking executives are projecting few buyers for stressed assets. The asset quality pressure for both banks and NBFCs is expected to rise in the financial year 2021. As a result, credit costs for NBFCs could grow by 50-100% over the next quarters. Which also brings us to the next impact.
4. Bank profitability
Such credit costs coupled with low credit growth is projecting record low profitability for the financial sector, measured by the Return on Assets (RoA) ratio. RoA is likely to reduce by 50-90 basis points in the financial year 2021.
On the positive side, India’s largest bank, SBI is expecting a 4-year high on RoA in this fiscal year. This has been enabled mainly by higher margins on net interest and higher income from interests.
5. NIM and other impact
COVID-19 is also impacting the Net Interest Margin (NIM) of the financial sector. NIM growth mainly depends on internal factors such as Capital Adequacy Ratio (CAR) and Current & Savings Account Ratio (CASA) that have been on the decline. In the coming weeks, NIM is further likely to reduce due to an increase in bank NPAs.
As reported on April 1st, here are the 5 best – and worst – banks ranked by its CASA ratio.
Apart from NIM and the CASA ratio, banks are likely to be adversely impacted by the increased cost of deposits and lower interest income. However, with the RBI lowering its reverse repo rates, banks can improve their retail asset business towards the end of the year.
Like any other nation, India’s BFSI sector is largely dependent on a robust economy and business activity for growth. With the current pandemic, the health of this sector will depend on the quick recovery of India’s economy.
To steer the country through these unprecedented times, the RBI and the Indian government have implemented several fiscal measures that are providing relief to financial institutions.