Woes of the Indian Financial Sector

by Anmol Arora

All was merry on Dalal Street, Mumbai until 30th January when an Indian student from Wuhan University, China, returned to his parents’ for a vacation in Kerala. This was, if you hadn’t already guessed, the first infection of coronavirus in India.



Fast forward to today, India stands as one of the worst affected countries by the pandemic with over 1,000,000 cases and 26,000 deaths.


Nationwide lockdowns and travel bans followed leading to a spike in unemployment figures and this, indeed, instigated what some refer to as the “most acute challenge to financial institutions in nearly a century”. With the Nifty falling from 12,080 on 20th Feb to a low of 7,610 in a matter of a month, the situation was sure to prove to be a force to reckon with.

Arguably, in these unprecedented times, the biggest concern for the banking industry is the rise in non-performing assets (NPAs).


Today, more people than ever before buy goods and services on EMIs and houses on mortgages. With job losses and salary cuts all around, meeting commitments of EMIs and mortgages will be awfully challenging.


Non-banking financial institutions (NBFCs) and traditional retail banking are the ones who will bear the brunt of this unfortunate situation. NPAs, which stood at 9.3% in December 2019, are anticipated to go up to 9.6-9.9% by the end of FY20.


PSUs reckon an increase of over Rs50,000 crore in NPAs for FY20. Slippage ratio is another indicator of the ruin for banks- SBI’s recently reported a slippage ratio of 2.94% from a mere 0.87% annually.


On 22nd May, in an effort to increase liquidity in the economy, the RBI cut the repo rate by 40 bps to 4% and soon, another 25 bps to 3.75% on 17th April. While it is well-intentioned, the question is whether this rate cut will do more harm than good. Banks are paying interest to depositors but are not receiving it from borrowers, this imbalance, I’m afraid like several “pandits”, cannot continue for long.

Real estate, also known as an investor’s “safe haven”, too, is succumbing to COVID-19. Since millions of workers have migrated to their hometowns due to lack of work, employers are dreading a nightmare scenario. For a labor-intensive industry like real estate, reverse migration is of paramount significance.


Looking at how things stack up at the moment, it's going to be challenging to kick-start operations back up even after once labor returns from their hometowns. Under the circumstances, shortage of construction workers is bad news for homebuyers awaiting flats, even if the projects are almost nearing completion.


Labour shortage apart, near-total restrictions on logistics and transport have disrupted supply chains, creating a scarcity of raw materials. The job losses and salary cuts have resulted in a sharp decrease in disposable income leading to a fall in consumer demand, at least for luxuries. This shortage of demand is envisaged to bring about a fall in real estate prices and house rents as well.

While all might look melancholic, insurance companies seem to have found some ray of hope for their bottom lines. The cost of COVID-19 treatment at private hospitals is exorbitant, to say the least. Some hospitals are charging over Rs 20,000 for each day of treatment, which could run into several lakhs over a mere two weeks.


Insurers are endeavoring to take advantage of this mockery by offering low health insurance premiums because the overflow of demand will make up for the difference. In FY20, the insurance sector witnessed robust growth of 13% for non-life and 18% for life insurance till Feb Y-o-Y basis.


Whereas awareness of health products has increased, renewals might get delayed because of the paucity of funds in the hands of the policyholders. Insurers realize that there is no better time to convince people to purchase their products and hence are offering generous “grace” periods for premiums.


Ever since the pandemic emerged, every company is trying to mold its business around it. Insurers have seen a spark in the interest of digital health products and are developing and using paperless and cost-efficient products, such as “HeartSignature”, to widen their horizons.

In the midst of this pandemic, in which businesses are shutting shop and people are defaulting on loans, the RBI was under immense pressure to put forth a recovery/stimulus package to nurse the economy back to health.


The central bank has since announced several steps to bring the economic landscape of the country to some degree of normalcy. To put borrowers at ease, the RBI announced a 3-month moratorium on interest payments and assured banks that the money not received in this moratorium will be excluded from their NPA classification.


The apex bank also offered the relaxed NPA rules for NBFCs, thus settling some nerves there. To ensure the liquidity of banks, the RBI announced the withholding of dividends on shares of banks.


Another important announcement came in the form of a stimulus of Rs50,000 crore for NABARD, SIDBI, AND NHB. The repo rate cut from 4.40% to 3.75% should boost short term liquidity as well.

While the world continues to wage its war against COVID-19, there is a silver lining for India. Several factors on the global stage are looking to play out in the nation’s favor. As the sentimental shift away from China continues, first-world economies like the US and UK will be looking to find economical outsourcing avenues.


India, an excellent alternative to China, now has a shot of becoming an outsourcing and manufacturing hub for the world. The country has the unique advantages of an abundant educated population between the ages of 15-57 available at a low cost.


Be it IT, financial services, or manufacturing, India can rise up to the challenge and seize this opportunity. Reportedly, over 300 foreign manufacturers are in talks with the Indian government for production in an array of sectors including electronics and textiles.


The pandemic has also given a much-needed boost to the medical sector. Billions of dollars go into R&D (research and development) every year in pharma companies and a cure of the virus from India would most definitely put the nation on the map.

On the other hand, owing to the demand and supply disruptions caused by the pandemic, the IMF eyes a 3% drop in world output and a subdued 4.2% growth for India in FY20. The outlook for FY21 seems to be rather gloomy as well with the IMF expecting a 1.9% growth for India.


While these numbers seem discouraging, one thing to be kept in mind is that India has, more often than not, outperformed the predictions of indices and intends to continue that tradition.



References

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