What are the three key things to watch out for in the banking sector in 2021? Let's find out.
Year 2020 was eventful for the banking sector in many ways. COVID-19 concerns dominated the sector for most part of the year. Banks faced a sudden shock in March when the government announced a nationwide lockdown in the wake of pandemic. The lockdown impacted the core operations of banks—lending and collections of instalments.
On the asset quality-front, the shock wasn’t felt in a big way as the Reserve Bank of India (RBI) announced the six months moratorium for all terms loans given by lending institutions (not just banks but also NBFCs). This was followed by the permission to do one-time loan restructuring (OTR) for banks for COVID-19-linked stressed assets. The moratorium saved banks from an immediate NPA shock while the OTR has effectively extended the moratorium for another two years.
Also, a Supreme Court order barred banks from tagging fresh accounts that were standard as on August 31 as NPAs. All this helped banks from reporting likely stress on their books due to COVID-19. Going by the guidance given by bankers, there are very few applications so far for loan restructuring both from retail and corporate borrowers. The guidance given by banks gives us a sense that the stress in the system on account of COVID-19 isn’t big.
But, it is too early to conclude. In fact, the OTR could act as a misleading factor for analysts and investors hiding the actual stress in the banking system for the next two years. Coupled with this, the suspension of IBC (insolvency and bankruptcy) proceedings till March, 2021, the entire process of stressed asset identification and resolution mechanism have come to a halt. This will be a source of uncertainty ahead.
How big will the NPA be when it comes out? It is difficult to estimate for any analyst at this stage. Much will depend on economic recovery.
Digital banking challenges
Banks have been aggressively ramping up their technology capabilities in 2021 mainly due to the fact that chasing customers in person turned difficult in the wake of the pandemic. Banks moved beyond basic banking services on their mobile/internet platforms and began using technology for a lot more activities including loan sanctions and disbursals.
But, a few episodes where large banks faced major failures on their digital banking channels, including the ones in HDFC Bank, alerted the RBI. The central bank, in December, asked HDFC Bank to halt all new digital launches till the issues are resolved. HDFC Bank isn’t the only lender which faced digital glitches. Country’s largest bank, SBI too faced prolonged glitches on its mobile banking app, YONO in December. Banks will have to strengthen their technology capabilities to convince the customer that internet/ mobile banking channels are reliable.
While the above instances were largely cited as genuine technology glitches at the data centers of the banks, fresh challenges emerged for the sector due to unchecked digital lending transactions.
There were a few incidents of suicides reported in Hyderabad due to alleged harassment by illegal mobile-app based lenders that raised alarm bells in 2020. This raised alarm bells forcing the regulator to issue an advisory to the customers.
But mere caution isn’t enough. There are no strong regulations even now to govern illegal money-lending apps.
Falling loan demand
The third big challenge for the banking sector in 2021 is going to be muted loan demand. Lenders will struggle to find demand from quality borrowers for loans. Loan demand slowed to a trickle in 2020 on account of the pandemic and a general economic slowdown. Consumer confidence has taken a severe hit during the year on account of job losses, salary cuts and closure of small industrial units. With more customers postponing consumer spending, analysts expect credit growth to remain a big challenge for banks.
The RBI’s credit growth data shows how bank money has become scarce for smaller borrowers. Loan growth to micro and small companies contracted 5.3 percent in this financial year compared with a contraction of 4.4 percent in the previous year. Overall credit growth till October this year has slowed to less than 6 percent compared with around 9 per cent in the previous year.
The good news is that banks have plenty of liquidity available in the banking system following the liquidity measures worth Rs 12.7 lakh crore announced by the central bank since February, 2020. But with no real demand coming from borrowers, banks have been struggling with this excess cash. In fact a significant part of this liquidity has been channeled back to the RBI’s reverse repo window. The 2021 union budget will be watched closely for demand-side measures.
To sum up, 2021 will be better for banks compared with 2020. But, the impact of the pandemic will continue to weigh on their operations
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)