InvestorQ : What impact you see of the COVID-19 pandemic on the banking and the financial sector in India and how that will impact funding costs?
Dia Deshpande made post

What impact you see of the COVID-19 pandemic on the banking and the financial sector in India and how that will impact funding costs?

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Ria Jain answered.
1 year ago
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Banking companies are likely to be hit by the COVID-19 in two ways. Firstly, it reduces the demand for credit and limits the expansion of their loan books. That mean; profitability and growth could be subdued. At the same time, banks will also have to contend with greater levels of NPAs as companies struggle to deal with solvency risk. As a starting point, the government has raised the threshold for invoking insolvency under the IBC (Insolvency & Bankruptcy Code) to Rs 1 crore from Rs 1 lakh. However, financial institutions and banks expect at least 90 days deferment in NPA (non-performing asset) classification because most banks anticipate that the real impact of the crisis will be felt in the next two quarters. Sectors like aviation, airport infrastructure, logistics, transport and hospitality among other would need some stimulus. Here is what banks are expecting?

· Banks feel the need for blanket forbearance on accounts which will turn NPA in the next three months. Otherwise a huge number of accounts will turn NPA. Banks expect the government to soon come out with bigger relief for the banking sector

· Banks are seeking relaxations and a number of NBFCs are looking up to banks for moratorium. For example, in case of NBFC-MFIs, as the operations will remain suspended, and MFIs would not be able collect dues from borrowers. This would be essential to avoid any downstream bankruptcy.

· The need of the hour is also to protect MSMEs from liquidation to a large extent. However, SMEs and MSMEs depend on large institutions for their survival and growth. Hence, the government must also extend necessary support to large corporations as well since they employ a large number of people and MSMEs are dependent on them.

· It is logical to expect that through the uncertain period, one can expect several new NPAs in the near future. With the possible suspension of Section 7 of IBC, the banking sector may have to look at other avenues outside of the IBC to put claim for the defaults. Secured lenders could possibly explore SARFAESI while banks with also have to look for some financial aid from the government.

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