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Before the pandemic, the Indian financial sector was already in a vulnerable state. India had one of the highest percentages of gross non-performing assets (GNPAs) among major economies. Furthermore, the liquidity crisis triggered by the Infrastructure Leasing and Financial Services default continued to impact the non-banking financial company sector, while a high level of corporate credit defaults resulted in a contraction of available credit. One bright spot, however, was the retail sector, with private banks, in particular, showing strong growth in segments like personal loans.

Prior to covid-19, the low- and lower-middle income classes were the key consumption drivers of the economy, accounting for 66% of India’s total consumption.

Graphic: Paras Jain/Mint
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Graphic: Paras Jain/Mint

Unfortunately, the same households are the population most meaningfully impacted by the pandemic.

On the other hand, high-income and upper-middle-income households account for 64% of the savings, where the impact of the pandemic is likely to be more mixed. Even if the economy sees rapid stabilization with aggressive containment and a large fiscal stimulus, expenditure is expected to decline by 9-11%.

A drawn-out crisis of 12-18 months could see expenditure decline as much as 55%, improving to about 35% through aggressive fiscal stimulus.

The pandemic will have significant impact on assets and asset quality. The RBI moratorium on interest payments, while providing regulatory support, reduces clarity on the scale of the problem. Lack of investment demand and uncertainty in business environment are likely to cause a considerable decline in loan growth in FY21.

The large population in the middle of the income pyramid will be badly affected by covid-19. This will have a significant negative impact on the following sub-segments and asset classes: MSMEs, unsecured debt, urban microfinance, and commercial vehicles, including first-time users, as well as first-time buyers.

Corporates, too, are expected to be hard hit given the slowdown, resulting in rising defaults. GNPAs, which had just started to decline, may see an increase again. Accordingly, banks will need to ramp up their collection infrastructure on retail loans and maintain a proactive NPA management programme.

On the liability side, two opposing forces are at play—income compression and also a flight towards quality, especially ‘safe’ assets such as current and savings accounts (CASA). This makes the overall movement of CASA balances uncertain. But well-capitalized banks with a low GNPA ratio and a good brand image are likely to benefit in terms of market share.

While the road to recovery for the sector appears long, proactive banks are likely to take multiple steps to mitigate risks and power through in the short to medium term. The first port of call for banks with a weaker capital adequacy ratio (CAR), or higher provisioning requirements, will be a capital raise to shore up their balance sheets. Several private sector banks are already making a move towards this.

Banks should include aggressive NPA management measures such as stress testing of their balance sheet and putting in place early warning signals to manage the NPA situation and move towards recovery over the next 6-12 months.

So far, banks have largely been growth and top-line focused. However, the priority now might shift to cost across their branches, contact centres and operations.

Banks should deploy multiple levers towards this, including changes in their operating model and digitization of processes. Customer experience is expected to become a key area of focus for banks, as they nuance their customer segmentation and prepare to offer customized bouquet of products, services and experiences to the right segments.

Furthermore, banks are likely to digitize large parts of the customer journey for retail, MSMEs and corporates. Here, they will look to partner with fintech companies and create the right ecosystem that enables digitized lending and fulfilling all needs of consumers.

Saurabh Trehan is a partner, Ramganesh Iyer an expert principal and Bhairav Shah is a principal in Bain & Company. They are leaders in the firm’s Financial Services Practice in India.


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