Covid19 : Is the Banking System going to Support the Economy?


We all know that it can be costly to fight the pandemic, and even have an inkling of how long it can take. However, there is much more cause to worry: the sudden and strong pressures on income and demand, for instance. These problems are set to widen the already-wide cracks of the Indian society.

The Weakest Link

It may come as a shock, but the weakest link in our economyis actually the banking sector. Surprise! Who would have thought that the sector that deals with money will be the first to ask for help? However, the truth is that this has been the case for quite some time now. You see, in the recent past the banks lent heavily to the industry when the economy was booming. Then the bad debts started trickling in, after which banks were not eager to lend for new projects. Due to such reasons, banks are in an arming situation right now and need the RBI’s help.

However, even though the times are tough, banks and the entire Indian economy can certainly benefit from a robust household demand. Even while the economy is seen to stall, households continue to buy goods, even if it means getting them on credit.

Banks have and continue to, cash in on this opportunity. A big part of the banking sector’s optimism lies in the fact that since Mr. Narendra Modi took office, retail loans have only gone up. They have grown beyond 28% of bank lending. In 2019, one of the major credit bureaus reported that unsecured personal loans had the lowest rate of defaults than all other loan categories- just 0.5%! Because of this, retail lending is a safe bet for banks.

Is the Banking Sector Crumbling?

Here’s what happened recently: the Indian shadow banking sector, which had been the chief lender to the underbanked multitudes, suffered from major defaults. They could not continue lending due to their mistrust. This is a problem that is seeping into the mainstream banking sector as well. When Kotak Mahindra Bank gave its realistic view of the possible effect of the coronavirus lockdown on its loans, its investors punished the bank. It seems as though the market is not too fond of realistic views. On the other hand, the HDFC bank was more confident that it won’t be much affected, even if it deals more with unsecured loans.

Banks’ Reactions to RBI’s Covid Regulation

Banks are not happy with the help that is coming from the regulators. They say that nothing substantial has come their way to ease their current problems, especially in the wake of the pandemic lockdown. While the RBI has advised banks to give a 3-month moratorium on loan installments, banks are not really sure how it will help. This is because interest will still add up for borrowers.

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