The Financial Market Centre (FMC) of XLRI hosted a webinar on “Structural Changes in the Banking Sector in the light of macroeconomic developments” on July 21, 2021. The webinar was delivered by Dr. Manoranjan Sharma, Chief Economist, Infomerics Rating, India. Dr. Sharma discussed the implications of COVID 19 on the Indian banking sector. He said “the banking sector is not a silo but is a microcosm, a miniature model of the broader macro-economy. Of late, the Indian economy has been hit by the triple whammy of demonetization, GST and COVID 19.
The hardest hit sectors require intensive human contact, viz., MSMEs, aviation, tourism, logistic and hospitality sectors, services, and construction; IT-intensive activities generally fared far better. India’s economy is crippled primarily because its four engines of growth — domestic consumption, government expenditure, private investment and exports — are
limping. Creating jobs is critical to recovery together with boosting demand”.
Financial sector regulators & Govt. initiated policy measures to ensure normal financial intermediation functions & mitigate widespread distress. Policy measures kept financial markets from freezing & eased liquidity stress facing financial institutions and households. Consequently, borrowing costs ebbed and illiquidity premia shrunk.
But risk aversion & lackluster demand impeded fuller flow of finance from both banks and non-banks into the economy. While banks have surplus liquidity, several important sectors are credit starved because of heightened risk aversion tiggered by demand and supply side shocks, diminished consumer confidence, NPAs & consequently pronounced risk aversion. 4 R’s- recognition, resolution, recapitalisation and reforms led to reduced NPAs from ₹10,36,187 crore (March 2018) to Rs 8,08,799 crore (September 2020), NPAs are not uniform either across bank groups or across sectors.
The surge in NPAs stem from pronounced macro-economic slowdown; high credit growth in some sectors leading to decline in credit quality subsequently and high incidence of advances frauds, which are partly the result of faulty credit appraisals,
monitoring and supervision. IBC, 2016 marked a paradigm shift. While IBC fell short of expectations, it led to
improved recovery ethics and enabling recovery environment.
Repeated Repo reductions failed to nudge banks sufficiently to lend aggressively to the productive sectors of the economy. Risk-averse bankers is quite complex and multi-layered because of mounting NPAs, fear of 4 Cs (CVC, CBI, CIC, Courts),
weak demand, pending wages, and economic uncertainty. Basic issues relate to modest capital buffers for most PSBs, mounting NPAs, higher credit costs, weaker earnings because of interest reversals bankers lower fee income and subdued growth prospects. SCB is, however, not a monolithic category and there are significant differences across PSBs and private banks & even within these two groups. Private banks are better placed to withstand post pandemic challenges.
Despite the use of the Repo rate signalling mechanism by the RBI & ample banking liquidity because of surplus capacity & lack of investments, unwillingness to finance large infrastructure projects by the private sector because of uncertainty and
heightened risk aversion inducing banks to refrain from lending except to better-
Usually there is a significant difference in the borrowing level across banks and one- size does not fit all. Banks, however, are generally not borrowing significantly because of reduced credit off-take and parking of surplus funds in G-Secs. The
Repo Rate has increasingly emerged as a signalling mechanism and banks are expected to follow suit. In a deregulated environment, however, banks take their individual call on the basis of their financial position, cost and yield, level of NPAs,