How will COVID-19 change the Banking Sector?
Updated: Jun 30
Human history has been a story of resilience & growth. Especially in the past few decades, “Globalisation” & “Consumerism” have been the two major drivers of economic growth across the globe in the past few decades.
But today COVID-19, a “Black Swan” event has halted almost everything which characterized the 21st century. With uncertainty looming over the entire economy, the banking sector that has acted as the backbone of economic growth is facing one of the major challenges of the century. Considering that the impact of COVID has varied from country to country due to the rate of spread, govt. decisions & the macro-economic conditions, I have chosen to focus on the impact of COVID-19 on the Indian banking sector.
To analyse the impact of COVID on the banking sector, it is important to analyse its impact on Customer Base & Banking operations.
To analyse this set of customers, it is important to look at majorly two cases. First in which the pandemic situation gets under control by end of September, Q2 FY21. Second in which the pandemic situation gets under control by end of March, Q4 FY21. It is equally important to analyse the sectors with high exposure to banks in both these situations.
In the first scenario; import & travel restrictions, labour migration, subdued demand & prolonged lockdown will impact the major sectors like the automotive, energy, real estate, retail, travel & hospitality. These disruptions in both supply & demand side will lead to an increase in the stressed assets. It is expected to be ~6.6% compared to 3.9% of Dec’19. Both PSBs & private lenders which have already been provisioning owing to the stressed cycle of FY16-20, are expected to face another such cycle, impacting the profitability of banks. The extension of the moratorium on loan repayments might lead to liquidity imbalance & might force banks to sell-off certain assets. It will also lead to a huge contraction in the credit growth which has already fallen to 1.7% as of Apr’20 as compared to 6.9% in Apr’19. High capital losses would force banks to focus on survival strategies putting their growth plans on hold.
The second scenario will lead to a long term recession, leading to an increase in NPAs & surge in bankruptcy cases in certain industries like airline & retail. Banks would face challenges in looking for suitable buyers in such market conditions. Reduced profitability & degrade in credit rating will result in the loss of investor confidence in the sector. This will lead to an increase in the cost of capital for the sector to maintain profitability & regulatory requirements.
Retail & SME Customers
The retail segment has been seen as the growth driver for most banks & has witnessed a 17% y-o-y growth as of Feb’20, even when GDP growth was lowest in a decade. But COVID-19 is expected to impact this segment due to behavioural changes in the target segment. Job losses, salary cuts & closure of small businesses (like restaurant owners/ small retailers) will impact the repayment of unsecured, consumer durable loans & SME loans. These loans have a higher contribution to banks’ earnings, so this will further impact the net interest margin, fees, and cost ratios. Cash crunch would lead to a slowdown in consumption, thus reducing the demand for retail loans.
Contact-less banking is going to be the new normal. This would require regulatory permissions & product innovations for certain processes. Usage of technology for processes like KYC, slot & appointment booking systems to manage footfall & digital-based relationship management & acquisition systems are going to be necessities in the new normal.
Social distancing norms will reduce the in-branch movement & increase pressure on the customer care department. This surge would require supporting the traditional call handling infra with chatbots/voice bots of enhanced capabilities to handle routine requests. Also, solutions like contact centre virtualization through cloud-based systems need to be implemented to reduce infra cost for additional staff.
The new work from home mandate in various red or containment zones will impact the documentation process. It will lead to difficulty in maintaining SLAs and controls as activity increases. So, to tackle this situation routine works need to be automated, VPN & virtual desktop needs to be set-up & back-office operations need to be spread to different locations to avoid disruption of work.
The Road Ahead
Supporting the Customers
“Dollars bills that the customer gets from 4 tellers is the same, what’s different are the tellers”,
This quote by Stanley Marcus shows the importance of customer experience in banking. And crisis can be the best time to build a long-lasting relationship with the customers. Regularly interacting with customers to figure out their financial health should be prioritised. The customer journeys need to be re-mapped for both corporate & retail clients to figure out their pain points & develop customised products. This can be based on the location of the client & their sector. Working capital loans in the form of trade financing & supply chain financing can work for SME & corporate clients, while insurance-based products might help the retail client base. More than this offering clients with consulting as an added service on economic developments will help in building customer loyalty.
Addressing Liquidity Issues
Liquidity issues can be addressed by analyzing slippages for best & worst case scenarios; clustering clients based on risk profile & keeping a watch on them; building trust in customer base through regular communication; disinvestment of certain assets; cutting costs allocated for growth & keeping contingency plans ready for fundraising.
Banks have continued to operate even in lockdown but with various challenges like reduced in-house workforce, closure of office space due to infections & wfh. This has forced employees to manage cross-functional cases, long working hours & reduced productivity. To tackle this issue the banks need to develop tech enabling effective wfh, e-training for cross-functional domains, apps for routine mental & physical check-up.
Crisis has always forced humans to come up with more innovative & powerful solutions. And this is indeed a once in a lifetime opportunity for even the banking sector to transform into a more robust, confident & socially responsible sector.
Ankit is an IIM & NIT alumnus, with experience in BFSI sector. An avid reader & traveler, he has keen interest in history, politics & economics related topics.