“COVID-19 may change choice & mode of delivery for banks”

Dr. Vikas Srivastava, Associate Professor, Finance and Accounting, IIM Lucknow, tells TPCI that increased liquidity may not be helpful for banks with high Credit:Deposit ratio. He opines that if more customers take advantage of moratorium and do not service interest and principal, in any case the advantages of increased liquidity get wiped off.

TPCI: What are the most pressing challenges for India’s banking institutions due to COVID-19?

Dr. Vikas Srivastava (VS): In the near term, banks will essentially try to maintain liquidity, protect clients and staff and upgrade technology. In the medium term, there may be pressure of corporate delinquencies across industries in general and some specific (most affected) ones. This may lead to stress on capital adequacy ratios and will require strengthening of risk management practices and compliance. Also, there will be pressure from clients and government. In the long term, return on equity for banks may come down and it may lead to realignment of staffing practices and HR policies.

TPCI: While the RBI has taken a number of positive measures to inject liquidity into the economy and to address the woes of the corporate sector, the same may not be necessarily true in terms of passing them on to customers by the private sector banks. What is your take on this? 

VS: RBI has raised CRR and there’s additional accommodation in MSF, but increased liquidity may not be helpful for banks with high Credit:Deposit ratio. It is because if more customers take advantage of moratorium and do not service interest and principal, in any case the advantages of increased liquidity get wiped off. So, in that context, we have to address this question. It is not right to call it as public sector /private sector bank issue. On top of that, there is also an issue of accounts already under “special mention accounts” category and their treatment.

TPCI: Customers have become quite sceptical about using ATMs owing to the possibility of transmission of the virus through currency notes. How can AI be used to address this? 

VS: AI is now being deployed to help segment different payments, collect data from customers, gain insights and provide suggestions based on payment history, (personalized payment solutions to clients); reduce pressure on call centers with the use of chatboxes. Digital payment methods like UPI, NEFT, contactless debit and credit cards are used to reduce dependency on ATMs.

TPCI: How can digital payments and transactions be augmented in the country, given that not everyone is familiar with their use? What kind of challenges exist to their expansion? 

VS: Banks will have to run campaigns highlighting health benefits of digital payments through social media, personalized emails, messaging etc. Business correspondents can also be roped in for the exercise. Apart from that, banks need to digitize their internal systems from treasury, credit (due diligence and KYC) risk management and compliance.

TPCI: Quite a few banks are anxious about extending loans to MSMEs and other sectors due to the fear of rise in NPAs. What can be done to dispel these fears? 

VS: Following are key measires that can be taken in this regard:

a) Credit guarantee scheme from government/ease of NPA recognition typically for SMA accounts

b) Emergency lines of credit from banks to MSMEs to tide off liquidity issues

c) Alternate funding and fintech platforms with understanding of MSME markets will get new business opportunity in these times.

TPCI: What role do you see for banks in revival of Indian business post-Covid-19? What will be the critical factors defining success/failure of banks in the post crisis period? 

VS: Banks will have to shore up capital for a possible increase in NPAs, assess downside impacts, strengthen risk management and ramp up the digitization process to make a difference during these times. Risk modelling tools and assumptions may become outdated. IT infrastructures may become overloaded, data may have blind spots and may be manual also in many parts.

Basic drivers of banking activity are intact. Credit penetration is still low in India as compared to globally. COVID-19 may change choice and mode of delivery of financial products, may be nature and structure as well. For example, firms with high liquidity and governments may become borrowers. There will be opportunities, but they will come with behavioural changes in both corporate and retail customers of banks. How well the banks understand these changes and nimbly position their offering with enhanced digital capacities (both front and back end) will make a difference.

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Dr. Vikas Srivastava is an Associate Professor in the area of Finance and Accounts at IIM Lucknow. He is a MBA, PhD and a visiting Doctoral Fellow at the Helsinki School of Economics under a scholarship by the European Union. His primary research areas are Project Finance, Corporate Banking and Credit Risk Management. He has conducted more than 120 specialized training programs for Banks based in India, South Asia, Central Europe and Africa. He was also an Advisor to Axis Bank Corporate Banking and Project Finance Group. He has handled consulting assignment for IFC Washington and ADB Manila on Sustainable Lending, besides giving consulting and training support to RBI, Large Public Sector banks, Centre for Banking Studies, Central Bank of Srilanka and Bangladesh Bank. He has coauthored a text book on Project Finance published by Oxford University Press, besides publications in International Journals and articles in Financial dailies.