Key takeaways for banking sector in India
Banks may have had a tough 2020 because they not only had to operate under tough conditions but also had to accommodate industry at a time when the overall financial position of the economy was extremely tight. Here are some key takeaways in the report.
• Indian banks were endowed with almost unlimited liquidity due to the rate cuts and the liquidity infused by the RBI through OMOs. The current surplus liquidity in the system is estimated to be closer to Rs600,000cr.
• The idea of this approach of the RBI was to catalyze the animal spirits of capitalism among industry so that a shortfall in liquidity and bank funding did not become a reason for slow revival in growth.
• The RBI report noted that the financial year 2019-20 was a year of strength and resilience displayed by the Indian banking system. Fiscal 2019-20 saw improvement in asset quality, capital adequacy and profitability of Indian banks.
• However, the report also warns that the impact of COVID-19 could severely dent the health of the banks in the financial year 2020-21. The report points out that as of Aug-20, nearly 40% of loans given by banks and NBFCs were still under moratorium.
• That means, the real asset quality problems may remain suppressed behind the asset quality standstill offered by the RBI to the banks and the borrowers as a special COVID-19 measure. Hence published GNPA figures may be taken with a pinch of salt.
• The RBI has done a stress test on a sample of banks and concluded that the actual gross NPAs as of September 2020 may be higher than the levels of NPAs in March 2020 by anywhere between 10 basis points and 66 basis points; and higher in specific cases.
• For the current year, the government had put a bar on banks declaring dividends to shareholders in order to conserve capital. RBI is of the view that the actual situation may be evident only when moratoriums are lifted and dividends by banks commence.
• The RBI expects to report a more comprehensive picture of the capital requirement of banks and also the profitability and GNPA levels when the RBI Financial Stability Report (FSR) is presented shortly. That is expected to give a clearer picture.
• The government has earmarked Rs20,000cr as capital infusion support for this year but that, according to the RBI, may have to be supplemented by these banks raising money from the open markets also.
Key takeaways for the non-banking sector in India
The RBI report on Trends in Banking also has some key takeaways for the non-bank participants in the Indian financial market. We are referring to other than SCBs.
• The report noted that while the small finance banks (SFBs) had benefited from the revival in agriculture; their collection efficiency had dropped during the lockdown. RBI has called for lesser dependence on unsecured loans for these SFBs as well as higher provisioning coverage ratio (PCR) to cushion the risks in SFBs.
• RBI also dwelt on the continued losses made by payment banks in India. Since they are absent in credit products, the models are too dependent on transactions and investment income, which does not seem to be working.
• On the NBFC front, COVID had severely impacted operations with the middle rung and smaller NBFCs the worst hit. Lower appetite of banks for sub-rated debt meant that only large NBFCs could get bank funding. MF redemption pressures also impacted NBFCs.
• Most housing finance companies (HFCs) were hit by delays in completion of housing projects and cost and time overruns. At the same time, the massive reverse migration of workers also dented demand for affordable housing.
• The report also noted that the rise of Fintechs, largely relying on technology platforms, was giving a run for their money to small and mid-sized financial players. RBI has called for a new outlook from banks and NBFCs to handle this challenge.
• Finally, this report also spoke at length on the need to narrow the regulatory arbitrage between banks and NBFCs. After the default by IL&FS and Dewan Housing, RBI has started the process of shifting NBFCs with significant externalities to a higher level of regulation in terms of income recognition, asset classification and capital adequacy; almost at par with banks. This is proposed to be achieved in a phased manner.