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Impact of COVID-19 on the Indian Banking Sector
This article investigates the impact of COVID-19 on the banking sector through the trend analysis of return on assets and return on equity of the scheduled commercial banks. It covers both the pre- and post-lockdown periods. The results suggest that the governmental measures are helping ameliorate situations of bad quality loans and will improve future prospects of the banking industry.
The author is grateful to K B L Mathur, former economic advisor in the Ministry of Finance, Government of India, New Delhi for his useful comments and suggestions on the initial draft of this article. The usual disclaimers apply.
As on 31 August 2020, customers accounting for 40% of the outstanding bank loans availed the benefit of moratorium allowed by the Reserve Bank of India (RBI) for borrowers affected by COVID-19. Most sectors reported lower outstanding loans under the moratorium in August 2020 as compared to April 2020; however, micro, small and medium enterprises (MSMEs) registered a marginal increase, and the number of MSME customers availing moratorium increased to 78% in August 2020, reflecting the stress in this sector. The distribution of moratorium sought in MSME loans indicates that urban cooperative banks (UCBs) bore the brunt of the incipient stress, followed by PSBs and non-banking financial companies (NBFCs). In the case of the moratorium availed for outstanding individual loans, the share of small finance banks (SFBs) is the highest, followed by UCBs, and NBFCs. Nearly two-thirds of the total customers of PSBs and half of the total customers of PVBs exercised the option to defer payments in April 2020 (RBI 2020a). As on 31 August 2020, this was reversed, with PVBs accounting for a larger customer base under moratorium than the other categories of lenders, mainly due to a fourfold increase in their MSME customers availing the benefit, and with a sizeable customer base across categories (majorly individuals) opting out of moratorium, in the case of PSBs (RBI 2020b).
Large borrowal accounts (exposure of `5 crore and above) constituted 79.8% of the NPAs and 53.7% of the total loans at the end September 2020. During 2019–20, PSBs’ gross non-performing assets (GNPAs) ratio, as well as the ratio of restructured standard assets to total funded amounts, emanating from larger borrowal accounts, showed a downward trend. On the contrary, PVBs experienced an increasing share of NPAs in such accounts. The share of special mention accounts (SMA-0) witnessed a sharp rise in September 2020. This may be an initial sign of stress after the lifting of the moratorium on 31 August 2020. However, the share of other categories of SMAs, that is, SMA-1 and SMA-2 remained at a relatively lower level (RBI 2020c).1, 2
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