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Like in many industries, the year 2020 will long remain etched in the history of the banking system as an exceptionally challenging one. In tough times, when banks were continuing to struggle with increased asset quality woes and preparing for large-scale PSB mergers, the catastrophic impact of the Covid-19 pandemic posed unprecedented and unique challenges, never dealt before by the present leadership.
Continuing to provide basic banking services while implementing Covid-19 protocols, particularly during the lockdown, was daunting. Tackling incidences of employees falling sick, and some of them succumbing to the virus, exacerbated the scare.
But the pandemic has highlighted the more critical role of banks in resurrecting the economy.Entrepreneurs at the bottom of the economy are intensely connected with the banking system for their survival and growth. Despite several internal challenges, banks have played a defining role in bailing out ailing entrepreneurs by routing stimulus. Moving forward, some strategic shifts in business paradigms can further strengthen banks.
Shift in loan portfolio
As part of their risk management strategy, banks are gradually shifting the mix of credit portfolio from a wholesale bias to retail and MSME, for better risk-adjusted returns. McKinsey estimates that the impact of one big-ticket loan going bad would be more severe than even a 25-30 per cent of a retail basket turning bad. Going by the Covid-induced stress of large corporate borrowers, the portfolio behaviour of banks may witness a shift towards low-ticket loans.
With banks set to collaborate with NBFCs for increasing credit flows, the credit-GDP ratio — trailing low at 50 per cent now — may look up beyond 2020. With deeper financial markets on the anvil, large corporates may increasingly bank on debt/equity markets and overseas routes to meet their fund requirements.
Banks are actively engaged in routing benefits of stimulus packages under Atmanirbhar Bharat. As on December 4, banks had sanctioned loans of ₹2,05,563 crore under the Emergency Credit Line Guarantee Scheme (ECLGS) and disbursed ₹1,58,526 crore, benefitting eight million entrepreneurs. The ECLGS 2.0 opens up the scope of the scheme to the 26 stressed sectors identified by Kamath Committee and extends it till March 31, 2020. Banks are tackling the Covid-induced stress post the end of moratorium period by restructuring eligible loan facilities in terms of the Kamath Panel template and MSME loans of up to ₹25 crore.
Digital transformation
With contactless and cashless services assuming more significance, banks have increasingly learnt to adopt digital modes to reach out to customers. Work from home, staggered attendance, rotations of assignments, meetings through videos and webinars have become a way of life in day-to-day banking operations. Many banks are contemplating development of a digital ecosystem to gradually move close to 50 per cent of employees to WFH mode in four-five years.
Digital inclusion efforts of banks struggling to pick up pace pre-Covid have now suddenly found increased adoption by stakeholders on their own. The RBI gave another boost by making RTGS available round the clock. The Indian banking system so far has focussed on digitising most of the liability-based products and remittance services. Propelled by the Covid crisis, banks in collaboration with fintech companies may adopt digital lending.
When such comprehensive set of banking services are digitised, banks can move towards the end-objective of reducing transaction costs to improve profitability and customer experience. This will require twin strategies of imparting financial and digital literacy and enhancing cyber security.
Looking beyond 2020
Managing the shocks of asset quality woes and capital constraints remain an integrated and perpetual challenge for the banks. Banks have to learn to live with higher NPAs and conserve capital. The broader vision should be to use the opportunities arising from the pandemic to strengthen the quality, diversity and growth of banks by adopting innovative strategies.
The newfound competency of human resources mined to connect with the stakeholders online should be further strengthened to reduce human intensive tasks. Among others, accelerated thrust on digitisation in credit administration can open up new vistas of growth for the banking system — a huge takeaway of 2020. Thus, for forward-looking banks, 2020 can act as a watershed to improve performance.
The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views are personal
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