16

COVID-19 BLOW ON INDIAN

BANKS: PARALYZED
BACKBONE OF INDIAN
ECONOMY
DOI: 10.31995/BOOK.AB169-J21.Chapter16

*Dr. Sonam Arora

Abstract
The outburst of COVID-19 pandemic brings a colossal shock
to the Indian as well as global economies. The Indian economy
was already passing through a parlous state of demand depression,
high unemployment, slow export, twin balance sheet crisis and
significant slowdown before the pandemic. The health crisis
already shifted into the economic crisis, and the economic
consequences of COVID-19 are transferred from one nation to
another drastically due to integrated supply chains system and
*Assistant Professor, L J Integrated MBA, Ahmedabad
218 COVID-19: Socio-Economic Crises in India
capital markets. India as a bank-based economy deals with capital
accessibility concerns, twin balance sheet crises, scaling down of
SME’s and corporate clients, increased defaults by Retail
customers and stress on asset quality which can be prolonged up
to 2 years minimum due to pandemic. In this chapter, the overall
effect of a pandemic on the Indian economy by understanding
GDP contraction and further focusing on the Banking Sector in
detail is analysed. The present situation of the banking sector is
analysed, by focusing on past roadblocks, present crisis and its
impact in the future way ahead. It is also considered the fiscal
room created by Government and Monetary expansion by Central
Bank and its implications with relevant data.
Keywords: COVID-19, Indian Banking Sector, Non-
Performing Assets, Economic Transmission
INTRODUCTION
The COVID-19 outbreak is a disaster that will remain in the world
for a more extended period as it impacted the lives of millions in a
colossal way. The always buzzing world has gone still due to lockdown,
social distancing, and measures taken to cope with never before the
situation. The face with the mask becomes the harsh reality of today.
This pessimism brings the multi-sector impact on the nationwide
activities and runs the alarm bell for the world economies to not fight
with a global pandemic.
An ailment with started from simple flu at a localised level in China
is now converted into a life-threatening complication globally. This
health crisis translates into global economic crises and gives an
economic shock that impacts demand (consumption and investments)
and supply (production of goods and services) in almost every sector.
The lockdown measures have disrupted international supply chains
system as well as collective demand, consumption and spending
patterns at large (Brodeur, Gray, Islam, & Bhuiyan, 2020) which further
lead to sharp financial market unrest and collectively amplified the
shock in economies worldwide (Barrios & Hochberg, 2020).
COVID-19: Socio-Economic Crises in India 219

Moreover, imposed lockdown across the nations (states) leads to

loss of employment and greater borrowing, increasing the level of
debts among firms and households. COVID-19 makes the short-
term shocks more potent compared to previous pandemics (Boissay
& Rungcharoenkitkul, 2020).
According to an early forecast of the International Monetary Fund
(2020), the world economy would contract by almost 3 per cent in
2020, leading to contraction of 4.9 per cent (predicted) by the end of
2020. The magnitude of the present situation exceeds the losses created
by the 2008 Financial Crisis. However, in its latest update of October
2020, the IMF revised the forecast to 5.2 per cent contraction in
2020. The contraction in the top ten economies is more significant in
the baseline as this pandemic is not restricted to any geographical
region. Another disturbing fact is that the economies of the developed
nations with excellent medical facilities are equally contracted due to
pandemic, which is an alarming scenario.
Around the world, governments and decision-makers were faced
with two significant decisions, i.e.: ‘People are prior to the Economy’,
or ‘Economy is prior to the People’ (Peterson & Thankom, 2020).
The Indian government, like many other countries, felt that people are
a priority and allowed the economy to suffer, which can be the right
choice at that point in time. However, the number of deaths due to the
pandemic is high, and it is worst of both sides. Other economies cannot
survive with complete shutdown situations, and it is a broad consensus
that the preventive steps taken to control the spread across the world,
though necessary had significant negative consequences (McKibbin
& Fernando, 2020) and leads to a high level of stress on markets
(Hyams & Murphy, 2002) with longer-term consequences.
This chapter is aimed to understand the contraction in the Indian
economy by gaining insights on the impact of COVID-19 pandemic
on Indian GDP and Indian Banking Sector. Pandemic has affected the
overall economy and every segment of the economy to an extent. This
chapter is restricted to the Banking Sector as India is a bank-based
220 COVID-19: Socio-Economic Crises in India
economy, and the disruptive effect of the pandemic is going to stay
long term in the banking industry. Before COVID-19, the Banking
Sector was already dealing with mounting NPA, de-motivated
employees, and Twin Balance Sheet (TBS) crisis issues. The pandemic
put pressure on the economy, corporate and households, which
increased stressed assets and loan defaults. Here the short term and
long term effect of a pandemic are analysed on the India Banking
Sector. It is also analysed the steps taken by Central Bank to cope up
the crisis and how these steps will affect the banks itself in the long
run.
UNDERSTANDING THE IMPLICATIONS OF HEALTH
PANDEMICS ON ECONOMY
Health is core to a prosperous and productive society while fear,
illness and unease of doing work can suppress production,
consumption, recreation, creativity and innovation of overall well-being
of economy (Smith, Machalaba, & Seifman, 2019). It is essential to
realise the potential impact of a health-related pandemic on macro-
economic trends rather than effects on one sector, industry, markets
or nation. Although few studies discuss the monetary costs of large-
scale outbreaks of infectious diseases to date, Schoenbaum (1987)
studied the economic impact of influenza. Meltzer et al. (1999) examine
the economic effects of the influenza pandemic in the US and evaluated
estimated mean total economic impact for the US economy is $73.1-
$166.5 billion. Bloom et al. (2005) evaluated the effect of avian
influenza strain (commonly known as Bird-flu) on Asian economies
and concluded two-quarters of demand contraction (combined effect
2.6 per cent Asian GDP or US$113.2 billion) and in long-term export
yields a loss of 6.5 per cent of GDP (US$282.7 billion).
The Ebola epidemic is another example of severe and unanticipated
emergency, which toll the economy of Africa (World Bank, 2017). In
two years 2013 to 2014, Liberia’s GDP growth decreased from 8.7
per cent to 0.7 per cent, and GDP growth in Sierra Leone (excluding
iron ore) decreased from 5.3 per cent to 0.8 per cent due to Ebola
COVID-19: Socio-Economic Crises in India 221

(World Bank Report, 2016). The conservative approach of estimating

the economic impact of health disease is restricted to direct cost (health
care development) or limited indirect cost (loss of employment and
income due to health sufferings). In 2016, the Second Panel on ‘Cost-
Effectiveness in Health and Medicine’ point-out the significance of
applying the societal perception and health sector perspective when
making an allowance for economic impacts of disease (Sanders et al.
2016). Poor health care infrastructure further increases the intensity
of this pandemic, especially in the developing nation like India. It is
necessary to understand the impact of any health disease on
geographical boundaries, sector specification, and type of stakeholders.
Because the supply-chain (Ivanov, 2020) and the workforce are
directly compromised, it makes community and consumer too fearful
of accessing services and making new investment decisions. Thus, the
present situations of the pandemic are more related to preparedness
towards the methods used for dealing the diseases globally.
UNDERSTANDING ECONOMIC TRANSMISSIONS
In a globalised world, the economic consequences of any crisis
are transferred to other countries swiftly due to the integrated resources
and supply chains (Chaudhary, Sodhani, & Das, 2020), and it is fair
to say that risk profile of this pandemic is relatively high. Thus to
understand the impact of COVID-19 on the Indian Economy, it is
essential to realise the economic transmission channels through which
the shocks adversely influence the economy.
According to Carlsson-Szlezak et al. (2020), there are three main
transmission channels:

Indirect Impact Channels:

Direct Impact Channel: Financial Markets reactions to this Negative Disruptions Channels:
Reduce consumption of good and shock. Labour demand fall drastically leads
services due to prolonged Situations are uncertain thus to lay-off and unemployment
lockdown across the nation individual afraid to invest and hold Supply chain disruptions
the liquidity
222 COVID-19: Socio-Economic Crises in India
Further, most economic agents adopted the attitude of wait and
watch due to uncertainties (Lee & McKibbin, 2012) and less economic
confidence (Baldwin, 2020). The crises struck economic machinery
at several places with a chain reaction.
Figure 1 Chain Effect of Pandemic
To control spread This generate the
The pandem ic is fast
policym akers uses condition of
spreader and brings
m easures such as unem ploym ent across the
health crisis
com plete shut dow n sector of econom y

D ue to shut dow n
Arises the problem of There is liquidity
there is reduction in
labour m igration from
urban area to rural
incom e of household crunch and no credit
and corporates w hich generation
areas
leads to bankruptcies

It creates pressure on m onetary policy, reduce the level of GDP,

put financial system in shock and freeze the real econom y

Supply chain restrictions, transportaion of im port and export

products, travel ban etc. leads to international dem and shock

The figure displays the effect of health crisis and methods of dealing
with a health crisis such as a lockdown or complete shutdown; social
distancing leads to unemployment, migration of workers, bankruptcy
cases among households due to financial distress and no new
investment generation among corporate which leads to an economic
contraction in India. This pandemic becomes an apt example showing
that non-economic/non-financial factors can generate both real
economic and financial meltdown across the globe and testing the
resilience of the financial system. It is essential to understand here that
none of the shock scenarios has uniform impact across the geographies
(Horowit, 2020) because there is a difference in the capacity of the
economy to absorb that shocks and the capacity of policymakers to
respond towards the shock.
COVID-19: Socio-Economic Crises in India 223

MATERIAL & METHOD USED

Most of the earlier studies based on the effect of health pandemic
on the economy has been stand on Simulation models. Economic costs
of any health crisis are derived from medical cost (disease-related
infrastructure creation, ex: research for vaccine generation) and forgone
income (due to mortality and morbidity). Economic projections or
simulations are closely linked to epidemiological forecasting (Bloom
& Wit, 2005) of the disease pattern (Lee & McKibbin, 2012). The
simulation model is avoided due to the pandemic’s associated
uncertainty, and the effect is not singular throughout the economy.
E.g., Over The Top (OTT) segment now became a full-fledge medium
of entertainment, and online streaming and media consumption grow
thrice to their year record (By September 2020 Online streaming grew
76 per cent compare to the last year 2019). In this chapter the impact
(negative) caused by COVID-19 on Indian GDP and Indian Banking
Sector in detail are discussed.
IMPLICATIONS OF COVID-19 PANDEMIC ON THE
GDP OF INDIA
India is a developing economy which is already passing through
tough times. Demonetisation and GST rules already created the
demand for depression and significant slowdown over the past few
years. The high unemployment rate, increased fiscal deficit, increased
corporate debts impacted the growth rate negatively. Indian economy
is going through the lowest growth rate of 4.7 per cent in the 2019
Q4, which is lowest in the last six years. Since then, the government
took several stimulus measures to bring back the economic growth to
the track with a firm hope of recovery in the first quarter of 2020
(Imtinungsang, 2020). However, the emergence of COVID-19
pandemic has made the expectation more difficult. With a drop of
almost 9.6 per cent in GDP growth in the first quarter of 2020-21 is a
massive blow to the Indian Economy (Srivastava, 2020). With an
increasing number of cases, the government put complete lockdown
of aviation and transport services, closed all establishments, and
224 COVID-19: Socio-Economic Crises in India
restricted mobilisations, which will slow down both demand and supply
(McGregor & Elegant, 2020). The signals of recession are quite visible
from a few years, but now the Indian economy is experiencing its
deepest recession since 1996 when it started publishing GDP numbers.
On the other hand, India becomes the second nation in the fastest-
growing number of current COVID cases on earth. The pandemic is
hitting the growth of economies by scale and speed.
Figure 2 COVID-19 Cases in India as on 30 September 2020

COVID-19 Cases
7000000

6000000

5000000

4000000

3000000
COVID-19 Cases
2000000

1000000

0
15-Feb 15-Mar 15-Apr 15-May 15-Jun 15-Jul 15-Aug 15-Sep

Source: Worldometers (https://www.worldometers.info/

coronavirus/country/india/)
Indian health care system is already depressed and not sufficient
for the population. This pandemic put extraordinary pressure on the
already rampant system. The government needs time to settle the
situation and this lockdown period is used for pilot testing, contact-
tracing, designing isolation wards & designated quarantine centres
and setting up treatment facilities including makeshift hospitals (Dev &
Sengupta, 2020). However, the rise of this spread was drastic from
June onwards, which put extreme pressure on the health care system,
especially in the worst-affected states. There is a rapid increase in
COVID cases in Unlock Phase I and II and the worrying part of the
story is that there has been a rapid surge of cases in the rural heartland
COVID-19: Socio-Economic Crises in India 225

of the nation where the health system is not inclusively available or

affordable.
For economic growth, the standard criteria are income per capita,
gross domestic product, industrialisation level, amount of technological
infrastructure and the general standard of living (Rana & Barua, 2013).
Today the most critical measure of economic growth used by
policymakers, academicians and researchers is GDP because it
measures the monetary value of final goods and services bought by
the final users- produced in a country in a given period (Subramanian
A., 2019). It is known from the fundamental macro identity that:
Y= C+I+X-M
Here Y is for GDP, C for consumption (private and government),
I for investment (private and government), X for exports, and M for
imports.
These all are hugely affected by lockdown. Business Standard
published a report prepared by KPMG (2020), which estimated India’s
GDP growth rate at the lowest level of 3 per cent in case of further
spreads and extended lockdown in the country as a single day of
lockdown could shear off 14–19 basis points from annual growth.
Barclays (2020) reported the cumulative shutdown cost to be around
US$120 billion, or 4 per cent of GDP. However, when we look at the
scenario after releasing Q2 GDP data, the situation is catastrophic.
Figure 3 Contracting GDP: India
Value (% change in GDP from previous period)
5

-5

-10

-15

-20

-25

-30
2018-Q4 2019-Q1 2019-Q2 2019-Q3 2019-Q4 2020-Q1 2020-Q2
Value (% change in GDP
1.17275 1.41451 0.90548 0.83647 0.86096 0.65894 -25.2481
from previous period)
226 COVID-19: Socio-Economic Crises in India
Investments by the private corporate sector are the considerable
driver of growth in any economy, which was almost a weight of 60
per cent of GDP in India. The total outstanding investment projects
were declined by 2.4 per cent in Q2 of 2019-20, whereas new projects
announced fell by 4 per cent. Consumption expenditure falls for the
first time in several decades stated by CMIE1 (Nadkar, 2019).
Government expenditure is the only item which is acting as a counter-
cyclical force to some extent. The steepest fall came from the 50 per
cent in construction, 47 per cent fall in trade, hotels, transport and
communication (Goyal, 2020). Manufacturing shrank more than 39
per cent, while mining and quarrying dropped 23 per cent (The Hindu
Business Line, 2020). Agriculture was the only silver lining with a
growth of 3.4 per cent (Webadmin, 2020). The eminent economist
Pronab Sen quoted in his interview to Business Today, “We would be
lucky if the growth rate is zero in the first half of 2021”.
EFFECT ON BANKING SECTOR
In the bank-based economy like India, the banking sector plays a
crucial role in mobilising the flow of money in the system and creating
wealth in the financial system (Malyadri, 2003). Historical evidence
clarifies that the stability of the banking sector affects financial stability
(Prasad & Reddy, 2012), and has a strong influence on the real
economy in terms of real output and labour market. However, the
present Indian Banking Sector is in distress and struggles to deal with
mounting figures of non-performing assets (NPA) in their balance sheets
(Claessens & Kose, 2013). Even the Prompt Corrective Actions
(PCA) taken by RBI prevents the stressed banks from expanding
their books and forcing them for resolution under the IBC Act2 against
defaulting firms.
India’s economy has been weighed down by structural and cyclical
factors, with finance as the distinctive, unifying element (Subramanian,
Felman, Ghosh, & Noqvi, 2017). Further from almost last decade,
we are dealing with Twin Balance Sheet (TBS) syndrome (Gowda &
Manjunatha, 2017) in which we are dealing with two balance sheet
problem: one with Indian Companies (as companies are over-
leveraged) and other with Indian Banks (bad loans encumbered). This
pandemic increased the issue of twin balance sheet drastically.
COVID-19: Socio-Economic Crises in India 227

Twin Balance Sheet (TBS) Crisis

TBS problem is a situation where the bank (lender) and corporate
(borrower) both are under stress (Junghee, 2012). Over-leveraged
companies cannot pay back their debts and invest more (Kotwal &
Eswaran, 1994). The bad loan encumbered banks cannot lend more
and struggle to keep up their business (Cichorska, 2014). This situation
put stress on the economy.The Economic Survey 2016-17 discussed
the terms Twin Balance Sheet (TBS) in detail and state it as –
overleveraged and distressed companies and the rising NPAs in Public
Sector Bank balance sheets (Sengupta & Vardhan, 2017). TBS
problem is crucial because it holds up private investment in the country
(Pudari, 2017). It has identified most of the issues that prevented
many measures introduced by the government - from SARFAESI
Act to Asset Reconstruction Companies, to Strategic Debt
Restructuring and the Sustainable Structuring of Stressed Assets
(Pudari, 2017). The crisis moves one step ahead when NBFC start
becoming significant lenders to the corporate, which boosted investment
and consumption both. However, the same thing happened with
NBFC’s and its leads to Triple Balance sheet Crisis.
Figure 4 Triple Balance Sheet Crisis
228 COVID-19: Socio-Economic Crises in India
The second wave of bad loans will be going to deepen with
COVID-19 and signals are already visible. According to India Ratings
and Research3, COVID-19 may impel total slippages of banks assets
up to Rs 5.5 lakh crore in this round (ET-BFSI, 2020). The RBI
already announced a number of measures to help the economy, i.e.
six-month moratorium for term loans, outstanding liquidity adjustment
facilities, targeted long term repo operations and a significant cut in
key lending rate among other (Economic Times, 2020). It is going to
make the path to recovery of NPA more painful. The banks’ recovery
to long-term averages for asset quality and profitability ratios will take
time (Lele & Roy, 2020). It is necessary to realise that banking sector
recovery will not only depend on the economic recovery (Lele,
Business Standard, 2020) but also influenced by the nature and extent
of the economic damage towards households and corporates (Lele &
Roy, 2020) before the start of the economic recovery.
Figure 5 Projection of Gross NPA
16
14
12
10
8 All Banks
PSB's
6
Private Banks
4
Foreign Banks
2
0
Sep. 2019 Sep. 2020 Sep. 20 Medium Sep. 20 Severe
Actual Baseline Stress Stress
Projections of Gross NPA ratios in various stress scenario (in %)

The degree of dependence on households for savings is a high

and vast scope of salary misfortunes that negatively affect the NPA
level. The monetisation of monetary shortage will make inflationary
weights at the higher side, lead to more susceptibility about the future
bulge, increment long haul financing costs and unfavourably bend
development (Prasanth & Sudhamathi, 2020). This situation hurt the
COVID-19: Socio-Economic Crises in India 229

validity of India’s expansion focusing on system and constricts the

adequacy of future money related approach activities. The time is
also hard for private banks as decrease stock costs stressed to their
financial and make it hard for the administration to recapitalise the
open segment banks (Chaddha, Das, & Gangopadhyay, 2017).
Corporate request RBI to have ‘patience’ and the consequences of
such concession would be lead to put acute pressure on banks (Duflo
& Banerjee, 2020) and under capitalised their balance sheet to an
extent to handle and harm quality and sustainability of the banks
(Bhandari, 2019). The present government already showed their desire
to consolidate the Indian banking sector and took steps in this direction;
a pandemic will give another reason to move further and pressure
banks, especially the banking unions.
In their report, Ind-Ra said the growth prospects of the banking
sector are muted (Business Standard, 2020) and revised the rating of
the sector from stable to “negative” for the second half of the financial
year 2020-21 due to the increase in stressed assets. The credit costs
are expected to be double and modest capital buffers of PSB’s are
depleted further in FY21 compared to the last year scenario.

Table 1 Banking Sector Disruptions

Short-term Disruptions Medium-turn Long-term Disruptions
Disruptions
Negative It leads to accessibility Increased in Stressed Rampant lay-off in private
concerns, scaling assets, loan default due banks.
down of SME’s and to reduced revenues and 11th Bipartite Settlement
corporate clients. margin, pressure for will be put on hold.
Increased defaults by recovery to maintain Declaration of Insolvency
Retail customers. balance sheets. by small players.
Heightened risk Stress on asset quality can
aversion in the be prolonged up to 2 years
banking sector will minimum.
hurt short term debt Lack of commercial credit
market. supply.
230 COVID-19: Socio-Economic Crises in India
Positive Scaling down the non- It is a rising need and New skill sets are designed
essential operations preference for digital to adapt to the changing
transactions. scenario.
Preferential When bank credit Growing preference for Preference shift from
Shifts growth has been low, Insurance policies structured savings
short term debt market especially, Life and instruments to asset-backed
plays an essential role Health Insurance instruments.
in debt financing.
Banks holding of Non-
SLR bonds declined
sharply. Which means
they try to averse of
any type of credit risk
Resultant: Banks are showing sign of higher credit risk aversion. It is quite visible as banks
are holding more Government Securities from their SLR requirements.

SCOPES FOR POLICYMAKERS

The present conditions of the Indian economy and increasingly
spread of pandemic provides a minimal scope for policymakers
(Sengupta & Vardhan, 2017). Fiscal deficit of the Indian government
was high in pre-covid period (4.6 Per cent of the GDP) against the
target of 3.5 per cent of GDP set under FRBM.4 Act. Even the fiscal
deficit already breaches its yearly target in the first quarter itself (Ohri,
2020).
COVID-19 catapulted the situation, as government imposed
lockdown which eventually reduced tax collections, increased health
expenses and infrastructure development cost, declining in the revenue
of public sector enterprises hampered the capability of the government
to hold up the economy (Maier Vidorno Website, 2020).
Table 2 Government Finances
Items Target FY 2020-21 Revised Target Current conditions
FY 2020-21 (by the end of 30
September)
Total Revenue INR 20.61 lakh INR 3.71 lakh
crore crore
Market INR 7.8 lakh crore INR 12 lakh INR 7.66 lakh
Borrowings crore crore
Total INR 25 lakh crore INR 30.43 lakh INR 12.48 lakh
expenditure crore crore
Source: Compiled from RBI Reports
COVID-19: Socio-Economic Crises in India 231

Given the scenario, the Government of India announced INR 20

lakh crore stimulus packages for the economy. Further the projects
like Atmanirbhar Bharat, a resilient India comprises around 10 per
cent of India’s GDP and will focus on land, labour, liquidity, and law
(Live Mint website, 2020). Leave Travel Concession Cash Voucher
Scheme, and Festival Advances are introduced by the Indian
government. However, increasing central and state fiscal deficit poses
a severe challenge to the government.
Monetary policy deals with its limitations of structural deficiencies
like an informal parallel system in a rural area, underdeveloped bond
market, and impaired banking system. In response to the slowdown,
RBI embarked the passage of monetary expansion.
Table 3 Monetary Expansion
Dates Repo Rate Reverse Repo
(in %) Rate (in %)
9-Oct-20 4 3.35
6-Aug-20 4 3.35
22-May-20 4 3.35
27-Mar-20 4.4 3.75
4-Oct-19 5.15 4.9
7-Aug-19 5.4 5.15
6-Jun-19 5.75 5.5
4-Apr-19 6 5.75
7-Feb-19 6.25 6
6-Jun-18 6.25 6
2-Aug-17 6 5.75

Source: Compiled from RBI Policy chart

232 COVID-19: Socio-Economic Crises in India
The repo rate is at its lowest since April 2009 (4.75 per cent),
and RBI pumped close to Rs. 10 lakh crore liquidity into the system
(The New India Express Website, 2020) yet credit growth did not
pick up (Mathew & Verma, 2020) primarily low credit demand from
stressed corporate and private sector, salary cuts to the household
sector and retail loans are its lowest. Retail inflation, measured by the
Consumer Price Index rose to 7.27 per ecnt (by the end of September
2020) from 5.84 per cent in March 2020. Supply chain disruptions
due to lockdown are still not recovered fully, and its spillover effects
are visible on investment, employment, income and consumption
pattern, which pulled down the collective growth of the economy.
Figure 6: Macro-Economic Scenario

Source: RBI Financial Stability Report, 2020

Figure 7 COVID-19 Adverse Effect on Bad debts
Debt in Rs Lakh Crore

Not impacted by Covid-19 but…

Not impacted by Covid-19
Impacted by Covid-19 but stressed… Debt in Rs Lakh Crore
Impacted by Covid-19 but not…
0 5 10 15 20 25

Source: RBI Expert Committee Report on Resolution Framework COVID-19 related

stress. Published: July 2020
COVID-19: Socio-Economic Crises in India 233

Figure 8 COVID-19 Adverse Effect on Banking sector debts

% share in banking sector debt

Not impacted by Covid-19 but

stressed pre Covid-19

Not impacted by Covid-19

Impacted by Covid-19 but stressed % share in banking sector debt

pre Covid-19
Impacted by Covid-19 but not
stressed pre Covid-19

0 10 20 30 40 50

Source: RBI Expert Committee Report on Resolution Framework COVID-19 related

stress. Published: July 2020

Considering the pandemic and the enormity of the weakening

balance sheet of corporate and households, the RBI is taking the
initiative of Loan Restructuring.
LOAN RESTRUCTURING: A WAY FORWARD OR
BACKWARD
The loan moratorium offered by banks had already ended in
August, which is availed by 50 per cent of individual loan borrower
(retail loan segment) and corporate (RBI Financial Sustainability
Report, July 2020). To relieve to impacted borrowers, RBI makes a
committee under the Chairmanship of K. V. Kamath. This committee
announced a loan restructuring plan with strict entry barriers (The
Hindu, 2020) only those eligibles whose income has been adversely
impacted by the pandemic and clearly defined timeline for
implementation (The Hindu, 2020) in the retail loan MSME loan
segments. The objective of this plan is to provide relief to borrowers
who are struggling in paying their existing debt due to changes in income
generation capacity. Bank are settling the scenario by rescheduling
loan payments, conversion of interest already accrued (or accrued in
future) into another loan by granting a maximum two-year moratorium
(The Hindu, 2020). SBI, PNB, HDFC Bank has rolled out their
restructuring plan for pandemic stressed borrowers and other banks
are expected to present their plan soon. This restructuring will come
with higher financial costs. For borrower opting loan restructuring plan
234 COVID-19: Socio-Economic Crises in India
come with additional interest burden (Ex: SBI is charging 35bps over
and above applicable interest rate for rest of the period) and restructured
loan is generally seen as ‘doubtful borrowers’ by a bank (Business
Today, 2020) and fear of the negative impact on credit rating holding
the households and corporate to take this option (Lele, Business
Standard, 2020). The accomplishment of this plan depends upon the
takers, but one thing is sure: India’s $1.4 trillion credit machine will
not be in fix mode until the first quarter of 2021 as restructuring “sucks
up bankers’ bandwidth,” and the span for new credit formation is not
great (Naik, 2020).
CONCLUSION
COVID-19 had caused considerable harm to our economy. The
nation will have to work collectively by managing fiscal measures
effectively; the monetary room is already given to an extent by RBI
and loan restructuring is another step in the direction and stimulus
package given by the government to support the economy. However,
the problem still lies in structural deficiencies of the system. The bank
plays a significant role in an economy, and there are in great stress.
The best indicator of the stress is the difference between lending rates
and the nominal growth of the economy, and this indicator is flashing
red at present. Indian Banks are conscious of their week financial
positions, the threat of merger and consolidation (privatisation of
nationalised banks) is like a massive stone on their head, week
transmission mechanism putting them under more stress and nausea
created by the pandemic is going to stay long with them. It is essential
to understand here:
“Banks are in risk as the economy is in danger; Economy is in
danger because banks are at the verge of risk.”
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for a medical shock. VOX-EU , pp. https://voxeu.org/article/how-should-
we-think-about-containing-covid-19-economic-crisis.
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ENDNOTES
1 CMIE: Centre for Monitoring Indian Economy
2 Insolvency and Bankruptcy Code (IBC Act), 2016
3 India Ratings and Research (IND-Ra) is one of the most respected Credit
Rating Agency in India.
4 Fiscal Responsibility and Budget Management (FRBM) Act provide a
long term objective set to achieve transparency and accountability in
fiscal management through discipline. FRBM mandates four fiscal
indicators to maintain the fiscal discipline, i.e. fiscal deficit as a percentage
of GDP, revenue deficit as a percentage of GDP, tax revenue as a percentage
of GDP and total outstanding liabilities as a percentage of GDP. FRBM
Act also has a provision of relaxing a fiscal target to an extent in certain
situations. For ex: Present Finance Minister Nirmala Sitaraman in her Budget
Speech on February 2020 used the clause provided under FRBM Act to
relax the fiscal deficit target for up to 50 basis points or 0.5 per cent. As the
target to achieve is quoted 3.5 per cent of GDP, which is going to be
breached and relaxation is pegged in advance by the government due to
COVID-19.