NPAs & Covid-19 implications temporary; Indian banking on path to revival: ETILC (2023)

RBI’s Financial Stability Report (FSR) of 2020 foresaw a surge in the Gross NPA ratio of the banking sector up to 13.5 percent in September 2021, from 7.5 percent in September 2020. If one goes back to Feb this year, the view at that point in time was that India has a more difficult task than other countries because we had a legacy of bad debt before COVID-19. As mutant variants of the virus succeedingly assailed the country with a pervasive health crisis, the already floundering pre-pandemic financial infrastructure was left fractured. However, across various sectors, despite the notion that India is surviving on borrowed time, there is hope yet at the end of the tunnel for the economy. With strict monitoring, the introduction of stimulus packages, and a swift increase in market capitalization in stock markets, green shoots are a possibility.

NPAs & Covid-19 implications temporary; Indian banking on path to revival: ETILC (1)

Through 2020-21, SCBs’ RoA and RoE sustained a positive rise of 6% in March 2021 on their CRAR. The GNPA and NNPA ratios also maintained stability during the second half of 2020-21 at 7.5% and 2.4%, respectively in March 2021.

"“RBI expects decreased NPA levels and foresees the banks maintaining a CRAR of above 9% even in the worst-case scenario, indicating that India’s economic recovery will sustain itself even in the face of third Covid wave.”"

— Mohit Ralhan, Managing Partner and Chief Investment Officer, TIWPE

Last year, due to the health crisis, a waiver on compound interest was sanctioned by RBI on loan accounts opting for a moratorium from March 1, 2020, to August 31, 2020. Due to this, there was a prospect of pressure on banks' finances. However, contrary to earlier inferences, banks are now better equipped to manage profitability, higher recoveries as well as higher capital buffers. In addition to this, the system must be given credit for issuing provisions and prescriptions just at the right time. These actions have led to an improvement in PCR. Subsequently, the banks’ provision coverage ratio (PCR) has also seen an improvement to 75.5% in December 2020 as compared to 66.6% in March 2020 owing to the implementation of timely provisions and prescriptions.

"In view of prudent risk management practices, adequate provisioning and focus on enhancing asset quality, we can adopt a cautious optimism regarding the NPA’s."

— Nitya Sharma, Co-Founder & Chief Executive Officer, Simpl

Even though borrower requests for restructuring may rise under the second restructuring scheme, the NPA’s are unlikely to cause panic. Unless Covid’s impact further worsens our economic landscape, we need not worry. To this end, the severity of the third wave can be mitigated through adhering to Covid protocols and increased vaccination. The healthcare departments along with fintech firms need to bolster their respective infrastructures and fasten the digital onboarding experience.

In her 2021 budget speech, Finance Minister Nirmala Sitharaman disclosed the Government's plan of privatization of two public sector banks and a general insurance company. To this effect, the Government is already working towards amendments for the General Insurance Business (Nationalisation) Act (GIBNA), as well as the amendments to the Banking Regulation Act, 1949. Central Bank of India and Indian Overseas Bank are said to be the probable candidates for the same. Privatization presents advanced opportunities to investors along with the potential to lower costs and enhance operating efficiency.

"Irrespective of the economic recovery, privatization of PSBs is a potent reform signal and could achieve multiples of the proceeds of piecemeal disinvestment which was followed historically."

— Anuj Kapoor, Head of Investment Banking, UBS

Adding to already issued measures for the upliftment of the economy, the Monetary Policy Committee (MPC) has decided to stick to accommodative and low-interest rates. Additionally, there will be a supplementary window for ₹15,000 crores to the pre-existing liquidity window earlier assigned for healthcare infrastructure, open for the banks to access at the repo rate, and direct loans towards travel agencies and hotels. The threshold of the Resolution Framework earlier decided on May 5th to grant loans to micro, small and medium enterprises has now been raised from ₹25 crores to ₹50 crores. This is a welcome move.

NPAs & Covid-19 implications temporary; Indian banking on path to revival: ETILC (2)

It is apparent that the digitalization of the finance sector is a significant factor in the sustenance of the Indian financial ecosystem. In spite of largely being a cash-based economy, as per RedSeer’s report, India’s consumer digital economy is predicted to experience an increase from USD 85-90 billion in 2020 to becoming a USD 800 billion markets by 2030, owing to the rapid amalgamation of ed-tech, e-commerce and increasing adoption of credit cards to our economic model.

"As a key constituent of the economy we have witnessed accelerated adoption of digital payments in India owing to the prevailing environment, which augurs well. As for the Indian credit card market, as a leading player we remain optimistic about its long-term business potential, owing to favourable demographic changes and low penetration rate."

— Mr. Rama Mohan Rao Amara, MD & CEO, SBI Card

RBI along with various supervised entities is also working towards strengthening the protection of our payment ecosystem and ATM infrastructure. The Computer Security Incident Response Team for the Financial Sector (CSIRT-Fin) under The Indian Computer Emergency Response Team (CERT-In) works on issuing warning threat intelligence alerts. The Cyber Swachhta Kendra in financial sector organizations also contributes to this effect.

"Fintechs, with the right product-market fit and seamless digital user experience grew multifold last year. Even though the rate of sustainable change remains low, this decade may see India become at least a “less-cash economy” if not a “cashless economy.""

— Avinash Godkhindi, MD & CEO, Zaggle Prepaid Ocean

With the pandemic, digitization has been rapidly adopted in B2C. What is lacking is its expansion to the B2B model and SMEs, which has the capacity to aid manufacturers by optimizing supply chains to safeguard the availability and affordability of goods. Integration of FinTech is the surest way to rescue the SME economy.

Policymakers and industry experts proffer an optimistic future for the Indian financial system backed by various new provisions and protocols. It is prognosticated that the GNPA of banks may rise to 9.8 percent to 11.22 percent by March 2022, from 7.48 percent in March 2021. However, the central government is determined to achieve a gradual fiscal consolidation by decreasing the gross fiscal deficit to below 4.5 percent of GDP by the year 2025-26. The Monetary Policy 2021-22 has also set the inflation target at 4 percent for the succeeding five years. What’s more is that RBI has also introduced the G-Sec acquisition program(GSAP) to expand retail investment in the G-Sec market, which would, in turn, infuse more liquidity in the market.

"With increased economic momentum, reaching 4.5% GDP by FY26 is feasible. The nominal GDP and tax collections should both accelerate, lowering the deficit ratio without resorting to many spending cuts. For FY22, a modest slippage relative to target 6.8% is expected, but can be overcome in subsequent years."

— Nitin Jain, CEO, Edelweiss Wealth Management

With speedy vaccination, policy stimulus, comprehensive packages like ‘AatmaNirbhar Bharat,’ and system-wide supervisory laid down by RBI across both banking and non-banking sectors protocols, there is, in fact, a great possibility of restoring the normal functioning of the financial market. With the rate of daily infections caused by Covid-19 gradually dropping and the integration of FinTech in the Indian financial system through digital payments, augmentation of financial literacy among the users, and effective cybersecurity protocols, the Indian financial ecosystem awaits not only containment of future risks, but also a hybridization of the financial model. However, it is vital that we continue taking these steps so as to avoid a stubborn fiscal deficit.

"Fiscal consolidation needs to be balanced with the job of bringing sustainable economic recovery. The correct route would be through a combination of revenue and spending side tools and through addressing long standing issues of improving the efficiency of tax administration (widening the net, reducing tax evasion, timely disposal) and reducing unproductive transfer payments and spending."

— Kanchan Jain, Managing Director & Head of India-Credit, Baring Private Equity Asia

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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