CFA, Finance, FRM

COVID-19 effects on Banking Industry

COVID-19 effects on Banking Industry

The pandemic has pushed the global economy into a recession, and a halt to economic growth. Amid the coronavirus pandemic, several countries across the world resorted to lock-downs to “flatten the curve” of the infection. These lock-downs have compelled ceasing almost all economic activity. The COVID-19 pandemic could be the most serious challenge to financial institutions like Banks as the economic fallout spreads, retail banks find themselves juggling some big priorities that require concrete steps to restructure.

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Banks face a second-order hit compared with the corporate and household sectors. The report said the economic storm created by COVID-19 will test the resilience of the banking sectors. The effects of COVID-19 on the Banking Industry will be severe – fall in demand, lower incomes, production shutdowns – and will adversely affect the business of banks.RBI has rolled out diverse measures to address COVID-19. These include liquidity injections, targeted loans to affected industries and regions, and policy rate cuts. Inclusive of support for banks to provide forbearance to otherwise economically viable households and businesses sideswiped by COVID-19. RBI also allowed a repayment moratorium for three months on all term loans. Lesser profits as provisions rise and customers avail moratorium. This will further entail more than of the banks to go for reconstructing their loan book amount. Possibility of an increase in NPA and Defaults. Proportions of bad loans rise with each situation, would attract more provisions.

Impact on earnings

Banks with weak pre-provision operating profit profiles and high base case provisions may register the greatest decline in earnings.

The four key trends we can expect (1) credit growth should largely hold-up as banks gained share in corporate lending, (2) deposit growth will show improvement as inflows have been strong and customers haven’t spent and many have taken moratoriums which will lead to deposit levels rising (3) slippages are likely to be marginal as loan were under moratorium and (4) loans under moratorium should show a decline.

Despite improving loan recoveries in June 2020, analysts believe the situation for the Indian banking sector remains fluid as the economic impact of Covid-19 is far from over.

Investment Strategy

Analysts say the markets still have not fully priced in the impact of lockdown. Banks stocks have corrected sharply and reflect the increased risk in the system, but valuations remain above global financial crisis levels. Remains its pick, despite its earnings vulnerability, due to favorable risk-reward trade-off.

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Digital Banking Channel

Amidst the lock-down due to the COVID-19 pandemic, more people are embracing digital banking and thus there is a surge expected in the digital payments transaction volume.

As the Banks have got a glimpse of their digital future now. This would follow a gradual shift from traditional to digital banking. This is the start of an important and positive change to the financial sector, showing how financial institutions can evolve quickly.

Banks need to actively consider the immediate needs of their people and simultaneously the multiple near-, short-, and medium-term operational, financial, risk, and regulatory compliance implications. They have an opportunity to support the market and economic activity and to facilitate a quick return to stability. If banks and capital markets firms respond well to these unprecedented challenges, they will not only help society but also increase trust and the reputation of the banking industry in the long run.

Need for To addressing the COVID-19 impact on banking, require crafting a strategic response across the immediate-, short- and medium-term by adopting the appropriate digital technology enablers and innovations underpinned by agile delivery models like

  • Analytics and insights solutions to identify and prepare for new risks
  • Business process re-engineering and automation to ensure availability of digital banking services
  • Artificial intelligence backed tools and conversational platforms to deal with a surge in call volumes

The uncertainty from COVID-19 will remain for the foreseeable future. Banks and capital markets institutions have no choice but to remain hyper-vigilant and rewrite the pandemic playbook as circumstances with COVID-19 evolve. While it is reassuring to see some aggressive fiscal and monetary policy responses around the world already, clarity on how these actions will stabilize markets and accelerate the path to normalcy is yet to emerge.

To Sum up, the key steps that would make the Banking Channel feasible and continue their dominance in the Financial Sector.

Focus on Business Continuity
Reaching and engaging customers thought Digital Banking Channels
Rethink Financial Challenges
Resetting Revenue Outlook
Redrafting the post-COVID-19 Strategy


Author: Deepika Shenolikar

About the Author: Deepika Shenolikar is professionally qualified as CFA. She is currently pursuing GARP FRM Certification and her primary interest lies in analyzing the market trends, investments, and aims for continual professional growth through learning.




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