Author: Aditya Shah
College: Jindal Global Law School
The banking and finance sector of India has observed various policy reforms which are considered to be of paramount importance when it comes to legislative or government policy implementation. The blog would begin with introducing banking and the banking and finance industry in India, and subsequently, dwell into one of the biggest issues prevalent in the current day world, that is COVID-19 and its effect on the Indian banking sector. How the various essential aspects of banks like ‘Non-Performing Assets’,’Lending Risks’,’Government Policies and Profitability’ have been widely affected by the emergence of COVID-19. The blog would include a mix of research methods with not only statistical data, but also involve an analysis of available data followed by a personalised inference and conclusion.
The banking and finance sector has been universally accepted to be the bedrock of any economy globally due to its immense contribution and role in the mobilisation and channeling of monetary and financial resources. Therefore policy reforms and legislations introduced which are relevant to this sector are considered to be crucial for the continued efficiency in function of the baking and finance field, ultimately leading to a strengthened backbone of the economy. In the Indian context, the banking sector is structured in a way that they are initially divided under two categories, being (a) scheduled banks, involving commercial and state cooperative banks; (b) non-scheduled banks, consisting of credit societies and central cooperative banks. In the Indian banking sector, there isn’t an absolute hierarchy followed, however, the presence of an Apex Bank can be observed. The Reserve Bank of India is considered to be the apex/Central bank which is the prime organisation that is responsible for the regulation of money supply in the Indian economy. In other words, RBI is said to have powers in respect of the monetary policy of India. The banking and finance sector is considered to be the backbone of the Indian economy for the above mentioned reasons, which are not repeated for the sake of brevity.
Impact of COVID-19 on the Indian Banking system
The emergence of COVID-19 pandemic has had various adverse effects not only directly on the banking and finance sector of India, but also indirectly in various damaging ways. The various hurdles, hinderances, and detriments faced be the Indian Banking and Finance sector are as follows:
- Mammoth Accumulation of Non-Performing Assets
A Non-Performing Asset (Hereinafter referred to as NPA) is a loan or advance which has been defaulted upon by the borrower for a period of 90 days or more. This includes both the interest amount as well as the principal amount due. The banking industry of India has always had a poor handling of loans and advances which lead to an accumulation of NPAs. There have been various cases though irrelevant to the COVID-19 pandemic, with, either the date of occurrence being during the pandemic, or the non-settlement of those, the shocks of which are still under recovery, are worth discussing in the blog. The first major case is the Vijay Mallya Scam which not only unravelled to be a scam which has led to the accumulation of NPAs worth Rs 9000 crores. Vijay Mallya’s acquisition of Rs. 9000 crores of debt, with an ultimately inability to repay back and eventually absconding has led to the accumulation of the debt as NPAs which till date has been scarcely recovered by means of liquidation of personal property and assets. Another essential case, is the Punjab National Bank Scam which led to the accumulation of Rs 11,400 Crores of NPAs, which till date too, have only been scarcely recovered. The gist of this case is the lack of technological adaptability of Punjab National Bank leading to delayed revelation of the scam and lack of access to transactional records by the respective banks which ensured non-discovery. The key areas were the lack of incorporation of SWIFT transactions with CBS (Core Banking Solution) which is a centralised system efficient for exchange of transactions among consumers and banks but also for the transfer and receipt of transactional information by the respective banks.
Apart from these cases, the COVID-19 pandemic has led to substantial economic failure among most sectors and consumers thereby leading to an increased chance of existing loan default which can possibly lead to an increased amount of NPAs in the country. This stance can be substantiated by the RBI’s calculated prediction amounting to an increase in Gross NPA to 13.5%.
- Increased Lending and Higher Risks
With the deadly blow COVID-19 has had on the Indian economy as a whole irrespective of the sector and its prior history, it would be highly appropriate to infer that the demand for loans by these devastated sectors would sharply increase to meet its liabilities and ensure its sustainability. The increased demand for loans can be observed from all walks, from the corporate sector, to personalised sector (involving automobile, and other personalised loans, etc.), to the educational sector and ultimately home loans. However, at the same time, on parallel lines, due to these sectors being financially stressed, their repayment or debt settlement probability can definitely be said to have dipped, hence leading to uncertainty of debt settlement thereby increasing risk manifold.
- Government Waivers
This issue can be addressed by two perspectives. One can the bank’s perspective which critiques such government policy implementations while the other would be the perspective of rest of the players. The Government of India introduced a waiver policy applicable from March 1 to August 31, 2020. Under this policy, borrowers who have had existing debt before the introduction of the policy are eligible to claim this moratorium/waiver thereby exempting them from the obligation of payment of interest or/and principal amounts due on their debt. This moratorium, allowed for people who have borrowed from recognised specific lending institutions to be exempted from paying interest and principal amounts. The loans eligible under this moratorium were ones worth upto Rs. 2 Crores with not a blanket waiver imposed but an optional one. From the perspective of others excluding banks, it can be said to be a highly beneficial policy aiding in re-achieving stability of stressed sectors and ability to withstand covid shocks. From exclusively a bank’s perspective, this policy measure is completely devastating since it does not provide for any relaxations on repayment of a bank’s own debts. Due to the loss of revenue of banks, the efficiency of meeting their own liabilities would rise thereby impairing banks rendering their financial condition unstable and even fatal in some instances. Additionally, the banks are also pressured to provide collateral free loans in some instances during the covid 19 pandemic leading to further uncertainties and risks.
- Pre-Covid Economy as well as Banking Sector not Strong
Another major reason and hurdle faced by the Indian Banking industry is the inability to withstand blows by the pandemic’s economic impacts due to the inadequate stability of India’s economy and the banking industry prior to the pandemic. The Indian Banking System was graded “bb+” from the previous rank of “bb” in March 1, 2020 as per the FITCH Ratings . Apart from that, credit growths of Indian Banks prior to the pandemic were also not very charming and impressive. Lastly the numerous influx bad loans, and the possibility of this number widening even further during the pandemic has put the Indian Banking system in a highly vulnerable state.
- Existence of Sectoral Debt
Various sectors, prior to the pandemic had been debt stressed. These sectors, with additional stress imposed by the pandemic has an impact on the banking sector. As per Hindustan Times. 19 sectors which were considered as stable prior to the pandemic have, during the pandemic itself, had accrued Rs. 15.5 Lakh Crores as debt with the already stressed sectors having an accumulated debt worth Rs. 22 Lakh Crores. Analysing this data can lead to a conclusion that the huge amount of debts incurred by various sectors already stressed would imply high uncertainty of new lending as well as prior ones leading to the possibility of rise of NPAs thereby immensely damaging the banking industry.
Conclusion (with personalised inferences)
To summarise the blog, and the observations stated along, it has been clearly evident that the Indian Banking system requires measures to be taken in various different dimensions to be able to cope up with the existing burden of the COVID-19 pandemic. One of the essential measures is the digitisation policies adopted by banks and increasing its adaptability with recent technological advancements so as to prevent and ensure quick detection of fraudulent practices which will aid in the reduction of NPAs occurring due to technological frauds, and improve customer’s experience since the COVID-19 pandemic has pushed people to adopt tech-savvy methods in all aspects of life, from banking to shopping. The increased growth of FINTECH is a clear example indicating the need for incorporation of technological advancements within the banking system. To rebound the dipped banking sector, more government funds should be allocated towards aiding banks with their lending operations. It is appropriate, hence, to conclude with a quote “If you have hit rock bottom, the only way to move is upwards”. The context of this is that though the banking industry has been devastated by the COVID 19 pandemic, thereby hitting rock bottom, the pandemic has provided an opportunity to the Indian banking system to restructure itself in ways to ensure a boosted revival as well as bring itself to speed with the most advanced banking systems of the world.