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COVID-19 has come out as the black swan event of the century, with enormous

macroeconomic impact both in India as well as globally. The exponential spread of COVID-19
has prompted a noteworthy fall in major indices showing its potential to significantly affect
GDP growth. While the overall impact on credit growth due to Covid-19 is now expected to
be negative across most sectors, yet the degree and nature of the impact is probably going to
depend on the duration and degree of disruption. In India, the pandemic has affected the best
of companies which were otherwise viable before the outbreak.
The Financial crisis of 2007-08 was considered to be the largest and the most severe financial
event that happened since the Great Depression of 1929-33 until the Coronavirus pandemic
came in late 2019 and the effects of which is being felt and will be felt in the coming months
too. In 2008, insufficient capitalized banks were part of the problem and in order to avoid
“sudden death” of economy, all actions were aimed at reviving finance to help the economy
get out of the increasing lethargy. The Indian economy had already been under stress since
some time and the Covid-19 outbreak has only made matters worse. It has presented
unprecedented challenges to the Government, industries and people all over the world. The
pandemic stays as a humanitarian crisis, and the economic impact has been profound.
Financial services firm have the opportunity to help businesses overcome the economic
downturn. However, experts are of the view that banks might be more risk-averse to
restructure loans this time having suffered huge losses in previous restructuring efforts. The
pandemic has left nineteen sectors previously not under stress before the pandemic account
for Rs 15.5 lakh crore of debt post pandemic. Retail and wholesale trade seems to be terribly
affected with outstanding debt of Rs 5.4 lakh crore. The pandemic has likewise affected 11
sectors which were already under stress having a debt of Rs 22.2 lakh crore. Out of these,
Non-banking financial companies (NBFCs) is the most noteworthy with Rs 7.98 lakh crore of
obligations.
The Banking, Financial Services and Insurance sector is the bedrock of every major country's
economy and has been badly impacted by the Coronavirus pandemic. The RBI has said that
banks have around 1.92 trillion dollars of credit outstanding and hold deposits worth about
1.69 trillion dollars. Banks, Non-Banking Financial Institutions, Housing Finance Companies
and other financial institutions have been hit very hard by COVID-19 and the vulnerability will
soon be visible. The foremost impact that the Banking and Financial sector is having and going
to have is the Default on Payments. Indian Banks have lent around Rs. 8 Lakh crores to Non-
Banking Financial Institutions as on March 27,2020 which is an increase of approximately 26%
Year on Year. The money borrowed by NBFCs is lent out to the customers at a higher rate of
interest and the majority of borrowers from NBFCs are small business owners on which the
chances of defaulting on payments has increased due to restricted business activity. Also,
there will be Default on EMI repayment and it wont just be the NBFCs who would default on
repaying to the Bank. The customers of Banks and NBFCs too would be defaulting and this
would add to overall cash crunch and will also lead to increase in Non-Performing Assets.
Moreover, as organizations lay off workers and cut pay rates, existing borrowers with retail
credits for example individual credits, home advances and so forth will think that it’s harder
to pay their EMI. This outcomes in crumbling of the credit nature of existing retail portfolios.
Bad loans are going to skyrocket and credit growth is going to come down tremendously.
NBFCs would now find it hard to lend to reliable borrowers and slowdown in loan
disbursements would ultimately reduce liquidity and increase cash crunch. The impact of
delayed payments would further reduce liquidity in the system and will subsequently impact
the credit quality of loans and portfolios. Further, there is going to be huge loss of capital and
with the tremendous size of NBFC loan and investment portfolio, the capital reserves may
just get wiped out due to mark to market losses and this would lead to violation of capital
adequacy norms.
Branch operations have been seriously affected in the course of the most recent couple of
months (because of the lockdowns and the dread of disease), restricting the capacity of banks
and financial institutions to provide loan, take deposits and direct other routine business. The
lockdown has been lifted in the end, yet the dread of contamination will linger on till a vaccine
comes effectual as well as broadly accessible something that most state will take time. As the
danger of contamination waits and contact levels related with banking at branches persevere
adamantly, banks and moneylenders are probably going to see a critical crumbling in credit
disbursals, income from the offer of monetary items and sometimes, even stores. In the
current climate, branches essentially won't have the option to proficiently deal with the sort
of burden that a developing bank would create with the entirety of the social removing
measures set up and the inescapable danger of an abrupt lockdown. India’s public debt ratio
may jump to 90% because of COVID-19 due to increase in public spending alongside falling
tax revenues and economic activity. India has grown at an average GDP of 6.5% per annum
from 1990 to 2019 but due to the pandemic, the economy grew at 4.2% in FY20 and is
expected to degrow @ 9.5% in FY21. The Coronavirus pandemic is affecting the financial
services sector in different ways from operational considerations and business continuity
issues to the overall financial outlook. As Banking and Financial services companies are
preparing and finding a way to mitigate these impacts, they will most likely face short-term &
long-term implications on both Profit & Loss Statement as well as Balance Sheet. The long
lockdown and the overall risk aversion will hurt the profitability of corporates and MSMEs. In
the midst of the profoundly questionable circumstance because of the pandemic, the financial
institutions will have to stress test their portfolios for all of the defined scenarios, to more
readily comprehend the impact. The current market and economic environment warrant
additional stress testing that may have direct ramifications for decisions that the financial
institutions may make. Recognising regions/sectors/clients that are most at risk and
reconsidering the credit arrangement under various economic scenarios will be essential.
Liquidity is the most important element for the economy in these times and the Finance
Minister Nirmala Sitharaman utilized the term around multiple times in the five introductions
she made to the media between May 13-17 to spread out the ₹20-trillion monetary bundle.
Of course, a critical segment of the bundle (₹20.97-trillion to be accurate) presented
liquidity—and not monetary improvement as organizations and financial specialists were
anticipating. RBI has cut the repo rate (the rate at which RBI loans to banks, regularly for the
present moment) from 6.5% in January 2019 to 4.0% at this point and has reduced Reverse
repo rate (the rate at which RBI borrows money from banks) from 4.9% in January 2019 to
3.35% at this point. Low interest rates draw in business and individual acquiring in light of the
fact that the expense of obtaining cash is more affordable. Organizations get to fund new
plant and hardware, fresh recruits and extended stock. People get to fund acquisition of
homes, vehicles, machines, dress and vacations. The RBI in order to provide relief to the
middle class permitted the lenders to allow a moratorium for three months of EMI that were
due between 1st March, 2020 to 31st May, 2020 for all personal loan. This was further
extended till 31st August, 2020. This certainly helped the people who faced loss of jobs, pay
cuts in and who were deprived of their regular cash flow. Had the moratorium not been there,
the lenders would have been forced to classify the loan as Non-Performing Assets. Also there
has been Restructuring plans and the Kamath committee has specified sector-specific ratios
on five major parameters – total outstanding liability to adjusted net worth, total debt to
earnings before interest, tax, depreciation and amortisation (EBITDA), current ratio (current
assets divided by current liabilities), debt service coverage ratio and average debt service
coverage ratio to decide whether or not companies will be eligible for loan restructuring. In
order to provide enough liquidity in the hands of people, the RBI reduced the Cash Reserve
Ratio by 100 bps to 3% and the Margin Standing Facility was increased to 3% of Statutory
Reserve Ratio and this was estimated to inject approximately Rs. 1.4 lakh crores of liquidity
into the system. There was working capital demand from the customers side and banks
resorted to sanctioning credit lines to existing borrowers. RBI also announced to conduct
auctions of targeted long-term repos of up to three years tenor of appropriate sizes for a total
amount of up to Rs. 1 lakh crore at a floating rate linked to the policy repo rate. Liquidity
availed by banks under LTRO would be deployed in investment grade corporate bonds,
commercial paper, and non-convertible debentures over and above the outstanding level of
their investments in these bonds as on March 27, 2020. RBI would buy bonds issued by State
Governments through secondary market open market operations so that they don’t face
rising interest costs amid high borrowings. Also, the RBI is increasing the size of each open
market operation from Rs. 10000 crores to Rs. 20000 crores.
A monetary boost is basically a situation where the administration reduces government
expenditures or expands spending in attempting to resuscitate the economy. The thought is
to place more cash in the possession of individuals, with the goal that they can spend it. At a
base level, liquidity could be the Reserve Bank of India's (RBI) endeavour to siphon in cash
into the economy and drive down loan fees, with the expectation that banks will loan. It
additionally implies convincing banks to give out credits rapidly. At the point when loan costs
reduce, the costs of bonds rise, giving the bondholders a benefit. At the point when business
action expands, organizations hire more employees and as the demand grows, the flexibly of
accessible specialists lessens and organizations must compensate higher wages to draw in the
best workers, so average income rises. As purchasers exploit low financing costs to purchase
houses, costs of those houses rise on account of the increased demand. Property holders
experience expanded pay as their homes acknowledge in worth, and they renegotiate to
make sure about lower contract rates or offer the houses to take a benefit. This likewise adds
to the normal salary. The after effect of higher normal pay is more cash in the framework and
considerably more liquidity.
The market turbulence and financial impacts resulting from the COVID-19 crisis are
consistently and continuously evolving. Bank liquidity teams must ensure that they
comprehend the current and continuing effects and set up strategic arrangements that can
be supported for a possibly extended duration. Effects on liquidity and financing accessibility,
risk management, reporting and management should be prioritized to empower assets to
rapidly and adequately address difficulties and requests on an ongoing basis. Coronavirus will
have long-lasting impact on many industries including banks. Post crisis, digital maturity and
COVID-19 versatility will decide procedure of banking players with three fragments rising:
banks that are future-ready with genuinely advanced digital abilities and cost elasticity, banks
that are digital laggards and that need to advance and recharge because of below average
COVID-19 strength and lastly some banks that will struggle to survive as a result of being
digital laggards with sub-par financial and operational resiliency. Coronavirus will change our
practices as clients, residents and employees in India and around the globe. As individuals
become more centred around their well-being, organizations will likewise need to see how
they can be essential for another new health ecosystem that is probably going to overwhelm
client thinking going ahead. The idea that “every business is a health business” is already
emerging in many corners of financial services, and that is perhaps one of the few positive
lasting impacts to result from COVID-19.

References:
1. https://taxguru.in/finance/impact-covid-19-recovery-debts-banking-industry.html

2. https://www.cnbctv18.com/finance/rbi-issues-faq-on-ltro-auction-heres-all-you-need-
to-know-5678971.htm

3. https://economictimes.indiatimes.com/small-biz/policy-trends/pass-the-coronavirus-
test-how-banks-and-nbfcs-can-survive-and-then-thrive-in-the-post-covid-19-
world/articleshow/76190269.cms

4. https://lawgupshup.com/2020/09/70-of-banking-sector-debt-affected-by-covid-19-
impact/

5. https://www.cnbctv18.com/personal-finance/rbi-emi-moratorium-banking-body-
answers-all-the-questions-you-may-have-5593611.htm

6. https://economictimes.indiatimes.com/markets/bonds/fpi-limit-in-corporate-bonds-
raised-to-15-for-fy21/articleshow/74897731.cms