THE ROAD AHEAD LOOKS ROUGH

RBI, yesterday evening, released a very important report - Report on Trend and Progress of Banking in India 2019-20. Its like a view-from-the-top into the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2019-20 and 2020-21 so far.

What we learnt from the report is that FY20 was a much stronger year, now that we have a pandemic struck FY21 to compare with – comparison with a lower base will obviously make the picture look prettier. But looking into FY21, RBI has warned that with 40% of outstanding loans under moratorium, the banking system could see some really sharp deterioration in asset quality.

Here are a few highlights of the Report which give us an insight into what to expect once the moratorium and other sops come to an end.

In India, although the banking soundness indicators are obscured under the asset quality standstill, banks are raising capital in preparation of the imminent stress.

Restoration of health of the banking and non-banking sectors depends on how quickly the animal spirits return and the revival of the real economy.

Under normal circumstances, GNPA ratios would have been higher in the range of 0.10 per cent to 0.66 per cent at end-September 2020.

Potential recapitalisation requirements for meeting regulatory purposes as well as for growth capital may be to the extent of 150 basis points (bps) of the common equity tier I (CET I) ratio for the banking system.

Small finance banks (SFBs), which were earlier NBFC micro finance institutions (NBFC-MFIs), continue to have significant exposure to unsecured advances even as they strive to diversify their portfolio

Payment Banks - most of these banks are yet to break even, mainly due to high initial infrastructure costs. Generation of capital funds in the absence of credit products poses a challenge for them.

Co-operative Banks - mobilisation of share capital has become difficult and raising additional capital at reasonable cost has emerged as a key challenge.

Banks will have to adapt and adjust to the rapidly evolving economic landscape due to these challenges and also the entry of niche players and emerging financial technologies.

NBFCs - With market confidence restored, NBFCs are striving to augment financing to niche sectors and assist in the economic recovery.

Housing finance companies (HFCs) - the sector may need to brace up for large slippages of loan assets and higher provisioning.

The banking and nonbanking sectors face both challenging times and new opportunities as the Indian economy returns to full vitality.

New vistas of financial intermediation, leveraging on technology will open up to be exploited, and new business models will emerge.

RBI is positioning itself to provide an enabling environment in which regulated entities are catalysed to exploit these new avenues, while maintaining and preserving financial stability.

At the end of it, what we feel is that this is an extraordinary time- we have gone through and are going through and will go through more challenges – challenges for which there is no set guidebook or precedence to follow. Under these circumstances, there is a sense of security that the country’s monetary problems are being taken care of by very able professionals; RBI has shown that it has the mettle to think out-of-the-box and hopefully, the coming challenges will also have some similar out-of-the-box solutions.

We are paddling from one rough water into another but the boat is strong and so is the captain….