In attempts to help adjust to a new normal and provide relief to citizens, governments have turned to banks and their stability. As the pandemic continues, the financial sector has voiced their concerns about the possibility of another banking crisis.
India’s banking system remains at the forefront of the financial industry today. Due to the increased challenges posed by the pandemic to its citizens and on a much global scale, it appears that Indian banks have will face more challenges in the coming months.
Because of this, the Indian government, as well as its people, would do well to pay more attention, not just about its banking sector, but its implications on the economy. To know more about the Indian banking landscape today and the risks it faces, read on.
Why The Indian Banking System Remains The Most Vulnerable
According to the Business Standard, Moody’s, a global rating agency, touted Indian bank at the most risk for having their capital and reserves depleted, especially if hit during a crisis.
The agency chalks this up to having low capital ratios, meaning Indian banks are barely getting by with their day-to-day expenses. This also entails that banks within the country are struggling to cover their finances.
Thus, they barely have enough to cover the costs of shouldering short-term expenses.
Another reason why India’s banking landscape seems vulnerable is that it currently errs on the side of having a lower ratio of corporate debt to GDP.
With banks geared towards providing loans to bigger companies and businesses at low-interest rates, this can result in high and or increased default rates. Take a closer look at some of the risk factors and vulnerabilities of the Indian banking system today.
Mass Loan Applications And Defaults
Indian financial institutions are at risk of facing more defaults. Despite informing customers that moratoriums are not synonymous with waivers, some customers have yet to grasp this concept.
As such, banks fear that payments may become nil. This may be because the loan portfolio of these establishments are mainly extended to gig workers and normal citizens who work government jobs.
Even huge corporations are not spared since many have had to scale down their businesses. The continued lockdown and job losses also play a part in the decline of repayments and the subsequent increase in delinquencies in asset portfolios.
Loan Impact Vulnerability
Due to the worsening financial impact and conditions caused by the pandemic, experts believe that banks can experience more risks for companies and individuals undertaking loans.
This may lead to defaults, particularly from the real estate sector and MSMEs.
Moreover, Indian financial institutions are more likely to experience a rise in bad debt or more defaults, especially with businesses calling for a moratorium on bank loans.
Such is the case with HDFC Bank who recently saw a huge number of borrowers signing up for the three-month moratorium announced by the Reserve Bank of India.
The increase in borrowers availing moratorium corresponds with lower income and fixed expenses staying put.
While these are only a precaution, this can bear great stress on the current financial climate in the nation and lead to weakened assets. Should borrowers and other customers fail to issue payments after the moratorium, this can affect the economy drastically.
General Bank Distrust
Just recently, YES Bank issued a request for a proposal to aid the bank in getting access to an additional round of cash flow following poor performance and low rankings in the country. This would help funnel is around Rs. 5,000 crores in the bank.
As the government, together with the Reserve Bank of India, puts on relief efforts to salvage YES Bank, global investment firm Nomura states that YES Bank’s continued decline poses threats to further failures of the Indian banking and financial system.
With the cracks in YES Bank showing, Nomura reveals that individuals and company holders may shift to doing business with public sector banks because of the relative comfort and security it appears to provide people.
Consequently, deposits accounts may greatly reduce from smaller private sector banks such as YES Bank. In turn, this may prevent private banks in the country to grow loan coverage, thereby affecting overall financial stability.
The Bottom Line
With recent developments, India’s banks are undoubtedly facing challenging times. However, as proven by their track record, there will be no surprise when the banking sector recovers. However, it may be a long path back to prosperity.