by Arul Kurian
Photo by rupixen.com on Unsplash
The COVID19 pandemic has sent chills around the world. The proliferation of the virus has been unprecedented in recent history. Focus is now being squarely put on reducing the physical effects and the rate of transmission, but economic impacts of this pandemic can be much more far flung and overarching. As the main engine of economy, banks are entrusted with a huge responsibility of mindful management of the financial system. It is disheartening to note that this engine of economy has not been provided with sufficient thrust.
The banking sector had been crippled with the inadequacy in the government interventions during the season. The enormity and spread of the disease outside China had been well known and advisories had been issued by central government as early as mid February. The following days saw an increase in the variety of restrictions which finally culminated into a total lockdown imposed from 25th March. There was enough time in the government kitty to deliberate on measures to provide relief to strained sectors. The terms and conditions for grant of moratorium and restructuring packages are not yet clearly laid down.
Banks are left in the lurch, to grant relief to customers on their own, due to delay in receiving guidelines from the government. Most of the medium and small scale industries have lost whole or a lot of their business during these difficult times. Cash flow has been disrupted and debts have been mounting. Agriculturists with little or nil land holding, daily wagers, migrant workers all have their own woes to deal with. The genuine concerns of the people about loan repayment should have been better thought about by the dispensation during the initial days of the crisis. Huge number of accounts may become “non-performing” due to sheer complacency, which will be unfair to the people and very damaging to the economy.
RBI has announced a sharp reduction in interest rates by 75 bps which is a welcome step, but the purpose would only be served when individual banks pass on these benefits to customers. To what extent this is going to materialise, is still to be seen. The CRR cut of 100 bps will help in infusing much needed liquidity into the system. Various other measures together will infuse Rs. 3.74 lakh crore liquidity into the banking system. Efficacy of all these measures leans heavily on early normalization of the current imbroglio. Government has also announced direct cash transfers to accounts of small farmers. This might lead to huge rush in banks for withdrawal, once accounts have been credited,(especially in rural areas) which totally goes against the current norms of social distancing. It puts bank staff as well as general public at the risk of transmission. So, alternate arrangements must necessarily be set up before going ahead with any such proposal.
Moratorium period announced for loans, which is one step which should have been taken by the government much earlier. Although moratorium is announced, interest will be accrued during the period when EMI is deferred. RBI must have opted for interest free moratorium which would have reduced the burden of repayment after the crisis season. Since these decisions came in with much delay, banks are forced to recalculate and recalibrate the interest rates and loan terms. This exposes bankers to various operational risks and makes them prone to committing unintended errors. Banks are made to work with skeletal staff and has been told only to do minimal transactions like cash deposit, withdrawal and remittances, but they are forced to do other transaction like gold loan closure and renewal because if gold loan tenure expires, customer won’t be entitled for benefits like interest subvention.
Restructuring of loans each time when a natural disaster happens is definitely not a permanent solution. Kerala announced one year moratorium for all loans after 2018 floods. It might again announce similar measures this year, in addition to measures announced by central government, including enhanced financial assistance to affected parties. All these measures could create a bubble, caused by excessive financing, which might burst at a certain point, and lead to a big financial crisis. Time has reached when policy makers have to come up with ‘out of the box’ solutions to deal with natural disasters and pandemics. One possible solution is to strengthen bond markets than to rely heavily on banks. Government could also think of possibilities of crowd funding to tide over disasters and giving direct financial help to clear over dues. Banks keep the economy afloat whether it is about braving the waves or enduring a storm. It is up to the leadership to steer it right.