Banking System in 2020 – A year in retrospect

Debut into 2021 marks an appropriate time to introspect into 2020 that will go down into the global history having caused unprecedented socioeconomic distress. With fears of new strain of coronavirus (Covid19) still looming around, the Indian economy is limping back to activity. Amid such ongoing distress, banking system, like other sectors have struggled to cope with unprecedented scale of challenges in 2020. RBI joined the fight with its timely policy interventions. 

Steep fall in benchmark interest rates, infusion of ample liquidity to close to Rs.12.7 trillion using conventional and innovative non-conventional tools, grant of moratorium in the repayment of loans, permitting restructuring of covid induced eligible stressed loans, temporary increase in the exposure norms for banks from the existing 25 percent to 30 percent till June 2021, stand still clause in classification of non-performing assets (NPAs), postponement of implementation of Basel – III norms till March 31, 2021 were some of the significant measures. 

The stance of the monetary policy has also been kept accommodative for as long as it is necessary to support growth. A low lending rate ecosystem has been developed to provide funds to the ailing sectors at affordable rates. As a result, the borrowing costs for government and corporate sector from the debt/money markets eased steadily.  

Despite the elevated levels of inflation staying beyond the upper edge of RBI target for last eight months, repo rate has been kept steady at 4 percent to provide affordable credit to ailing sectors keeping economic growth priorities ahead of inflation control. The historic decision to refund compound interest amount to all borrowers for loans up to Rs. 2 crores and apex court holding the classification of bank loans into NPAs is unprecedented. 

1. Covid induced challenges: 

Banks in the midst of large scale disruptions due to mergers, asset quality woes and low credit off take even prior to Covid19 outbreak were stupefied to tackle the unprecedented new challenges arising from the pandemic. Functioning in the midst of lockdown, social distancing with thrust on contactless digital outreach called for quick innovation. 

The responsible role of banks to deliver some of the cash relief to the beneficiaries, more importantly to the Pradhan Mantri Jan Dhan Yozana (PMJDY) account holders involved tackling several logistical and safety issues. Synchronizing with the pace of opening up of the economy, banks were to dispense fresh credit to ailing borrowers to restart their operations. Using the liquidity windows of RBI available under targeted long-term repo operations (TLTRO), banks have dispensed credit to non-banks and other ailing sectors to enable them to remain active in lending activities.

2. The domestic economy: 

Apart from the social distress, the economy was hard hit due to lockdown and pause in economic activities. Many informal sector employees lost their jobs. The migrant labor marched miles to reach home and yet to connect fully with the industry. Such massive economic slump led to deeper recession with GDP recording -23.9 percent in Q1 and -7.5 percent in Q2 of FY21. 

It has been the fifth and worst recession since independence.  The earlier spells of recessions witnessed fall in GDP very marginally,        -1.2% in FY58, -3.66% in FY66, -0.32% in FY73 and -5.2% in FY80. Poor monsoon, balance of payment crisis, severe draught, collateral impact of war, energy crisis and oil shocks arising from Iran-Iraq war were some of the reasons for the de-growth of the economy. But the current spate of recession is unique caused due to lockdown and ceased economic activity to prevent spread of virus. 

Going by the resilience of the economy, RBI expects the current fiscal – FY21 to end at -7.5 percent of GDP.  The growth of GDP is expected to enter positive trajectory beginning in Q3 to build upon the growth tempo. Most global think tanks have improved economic outlook of GDP for India during FY21 – World Bank  –9.6 %, IMF  -8.8 %, ADB  -9 %, Standard and Poor   -9 % and ICRA puts it at -7.8 %. 

Among the granular performance indicators, manufacturing sector surprisingly entered positive trajectory at 0.6 percent in Q2 overcoming deep contraction of -39.3 percent recorded in Q1. Agriculture stayed steady at 3.4 percent in Q1 and Q2 while services sector narrowed its negative growth from -20.1 percent to -10.8 percent during the period showing propensity of the uptick.  

3. Flow of relief measures: 

Strengthening the collaborative support measures and adding to the past stimulus packages, the Atmanirbhar 3.0 (Rs. 2.65 lakh crores) has raised the total relief to Rs. 29.87 lakh crores working out to 15 percent of GDP. In creating buoyancy, passing on the stimulus relief and delivering ease of doing business built in policy reforms will be a long run process. What becomes more significant in near term is the role of banks in dispensing quick loans, restructuring eligible loans to provide more time to borrowers and creating latitude to the entrepreneur to focus on restarting units will continue to be at the center stage to focus on economic revival. 

Intervening further in time, the government expanded Emergency Credit Line Guarantee Scheme (ECLGS) 2.0 to provide government guaranteed collateral free credit support for 26 stressed sectors identified by the Kamath Committee. Now, borrowers having existing outstanding loans of Rs. 50 to 500 crores can also get additional loans up to 20 percent of outstanding standard loans as on February 29, 2020 provided overdue, if any does not exceed 30 days. The annual turnover limit of the unit of Rs.250 crores is also lifted. The tenor of this additional credit will be five years, including one-year moratorium. 

Guaranteed by National Credit Guarantee Trustee Company Limited (NCGTC), ECLGS loans will carry concessional interest rates not exceeding 9.25 percent so that these units can start activities with fresh fund flows. The scheme will be open till March 31, 2021 or until Rs. 3 lakh crores of limit is fully used up. As on November 12, banks and financial institutions had sanctioned Rs 2.05 lakh crore to 61 lakh MSMEs. However, disbursements stood at Rs 1.52 lakh crore.

This liberal version of the scheme can go a long way in helping the units to revive. 

In order to convert the catastrophe into an opportunity banks should take forward the renewed thrust on digital banking in 2021 and beyond to improve operational efficiency and profitability. In fighting the pandemic, some of the key learning such as compassion, solidarity, greater collaboration, sensitivity towards health, immunity and hygiene must form part of organizational values. Learning from the ordeal of 2020, banks should be able to catch new trajectories of growth.