Combating COVID-19 with resilience Banking and Financial Services Not a banking and financial sector crisis but an economic disruption which can lead to one COVID-19 has emerged as the black swan event of the century, with significant macroeconomic impact both globally and in India. However, the current crisis is different from the one we faced in 2007 – 08, as it is driven by disruptions in the real economy and not the financial system. Moreover, our financial system is more resilient than it was a decade ago, primarily due to various initiatives taken by the government and regulators—resulting in improved capital adequacy, credit worthiness, and asset quality. As we think about potential policy interventions to combat the economic fallout of COVID-19, we need to ensure that lending standards are not diluted and the overall asset quality of bank portfolios are maintained. In the current environment, the Government and RBI can play a substantive role in facilitating support from banks and financial institutions to enable borrowers to ride out the resultant slowdown. What’s in store for the sector Immediate implications While the sector prepares to provide support to businesses and corporates, retail customers, employees and society at large, this is expected to put a strain in many ways. As financial services companies are mobilising and taking steps to minimise these impacts, they will likely face implications that they need to consider.
1. Disruption in banking operations and service continuity: With the sector facilitated by a network of over 1.5 lakh branches and serviced by 14.5 lakh bank employees, the lockdown has impacted customer reach and quality of services, which may lead to lower bank profitability. 2. Strain on capital adequacy and other prudential norms: With possible adverse impact of the economic slowdown on borrowers’ condition, prudential norms of banks including capital adequacy may also take a resultant hit. 3. Depleting liquidity and mounting debts in the MSME sector: Due to large scale supply chain disruptions and relocation of labor, corporates, particularly MSMEs are likely to face a potential liquidity management and debt servicing problem. 4. Export and import related vulnerability: Near lock down and quarantine in the main export destinations like US and Europe have increased the financial vulnerability of the export sector and underlined the need for additional financial support.
Volatile exchange rates: A weakening rupee could burden importers with unintended costs and adversely impact the operating profit.
Formulating response to the crisis
1. Set up a national cloud infrastructure 2. Relax current norms relating to Risk and augment ATM networks to enable Weights and give credit expansion uninterrupted branch services Most of the banks currently have adequate
Build and strengthen the government’s cloud initiative, “Meghraj”, to include a dedicated banking cloud platform for all banks, including regional rural banks, cooperative banks, Micro-Finance Institutions and NBFCs, to improve on financial inclusion. - A cloud based solution can (a) enable bank employees to work remotely, (b) establish connected contact centres, and (c) result in rapid scaling up of branches. - Add more ATMs including biometric enabled ones, with regular servicing of 24*7 bank transfers. Case in point: Adoption of a cloud based strategy enabled a large global banking conglomerates to cut down installation time for its more than 20,000 internal applications from 45 days to less than 20 minutes for all new branches1
3. Ensure adequate credit availability to corporates and MSMEs
Release a substantial portion of the pending payments to corporates and SMEs, estimated at Rs. 48,0004 Crores —either payments currently under processing, advances, or any payments / projects under dispute. Issue similar advisories to large corporates.
Consider releasing advance subsidy payments for 1 month for all interest subsidies as well as sectors like food and fertilizers, which would amount to around ~INR 21,800 Cr., given annual budgetary outlay of Rs. 262,000 Cr.5
Provide enhanced and value-added credit guarantee support through the CGTMSE scheme facilitating increased lending.
Case in point: The US COVID-19 economic stimulus package includes USD 376 billion of additional financial support for small businesses and their employees.6 1 2 3
capital adequacy2, with private sector banks typically having a higher capital adequacy ratio. Accordingly, a larger share of credit expansion could be organised through private sector banks.
The government/RBI may consider relaxing current norms on external credit ratings on risk-weighted assets basis to allow for any short-term stress resulting from the current economic downturn.
Case in point: On March 11,2020 the Bank of England lowered capital requirements for UK banks, by reducing the “counter cyclical capital buffer rate ” to 0% of exposures to UK borrowers from the original 1%3
4. Encourage exports through exporterspecific schemes
Boost emerging sectors through special export incentives (financial and non-financial)
Support exporters by providing bridge financing (supply chain / working capital) for the next 12 to 18 months to make up for the lack of finance due to global liquidity problems.
Manage overall forex volatility through intermittent market intervention to stabilise Indian Rupee to reduce the operating cost (import of goods & services in 2018 was 23.64% of GDP7).
Case in point: Canada, under its COVID-19 economic stimulus package, has provided additional funds of 40 billion Canadian Dollars under the newly established Business Credit Availability Program. These funds, to be provided through the Business Development Bank of Canada and Export Development Canada will be used to extend loans and guarantees to exporters and SMEs.8
Source: https://www2.deloitte.com/uk/en/pages/financial-services/articles/getting-cloud-right-how-can-banks-stay-ahead-of-curve.html Source: Reserve Bank of India Financial Stability Report, December 2019 Source: https://www.bankofengland.co.uk/news/2020/march/boe-measures-to-respond-to-the-economic-shock-from-covid-19
4
https://economictimes.indiatimes.com/small-biz/sme-sector/choked-by-dues-what-efforts-are-being-taken-to-ease-the-biggestproblem-faced-by-indian 5 https://www.indiabudget.gov.in/doc/eb/stat7.pdf 6 7
8
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options Source: https://data.worldbank.org/indicator/ne.imp.gnfs.zs
https://www.canada.ca/en/department-finance/economic-response-plan.html
Contacts: Deloitte Touche Tohmatsu India LLP
Acknowledgements: Sanjay Kumar Arindam Guha Sanjoy S. Datta
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their re lated entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. This material is prepared by Deloitte Touche Tohmatsu India LLP (DTTILLP). This material (including any information contained in it) is intended to provide general information on a particular subject(s) and is not an exhaustive treatment of such subject(s) or a substitute to obtaining professional services or advice. This material may contain information sourced from publicly available information or other third party sources. DTTILLP does not independently verify any such sources and is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such sources.. None of DTTILLP, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering any kind of investment, legal, or other professional advice or services. You should seek specific advice of the relevant professional(s) for these kind of services. This material or information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person or entity by reason of access to, use of or reliance on, this material. By using this material or any information contained in it, the user accepts this entire notice and terms of use.’ Reproduction and redistribution without prior permission is prohibited ©2020 Deloitte Touche Tohmatsu India LLP. Member of Deloitte Touche Tohmatsu Limited