Md. Harun-Or-Rashid :
Covid-19 represents a much global shock in economy as well as banking. Mitigation efforts of corona infection such as social distancing measures and partial and national lockdown measures have a significant negative impact on the economy. The financial sectors, mostly the banks, were expected to absorb the shock by contributing vital credit to the corporate, SMEs and households. In an effort to facilitate this, central banks and governments around the world enacted a wide range of policy measures to provide greater liquidity and support the flow of credit.
As such in a situation, financial sector policy initiatives should focus on Liquidity Support (a measure used by monetary authorities to expand banks’ short-term funding in domestic and foreign currency, Prudential Supports (a measure with the temporary relaxation of regulatory and supervisory requirements including capital buffers, Borrower Assistance (a measure include government credit line facilities or liability guarantees, and, finally, Monetary Policy Support (a measures includes policy rate cuts and quantitative easing).
In response to Covid-19, many financial institutions have enabled alternative working models and served customers in new ways. Remember, depending on the scale of government assistance, credit defaults could be higher than during the 2008 global financial crisis. Lower interest/profit rates could reign, potentially accelerating compressed net interest/profit margins and impacting a key revenue stream for banks.
A new and different normal for financial services could make banks to squeeze continual reinvention of their business models and solutions. How should banks manage costs, transform operations, and use technologies such as AI and Cloud to impact innovation and the digital delivery of products and services? All are in play. It could be a matter of survival.
Banks are committed to preserve their profit margins continuing business as usual and thus, reassuring anxious customers who can benefit significantly from using a digital front-end platform. What is the best way to address pandemic changes? The need to mitigate the risk of an increase in non-performing loans due to Covid-19 calls for investments in automated credit decision-making. It is combined with the use of transactional behavioral data which allow exposure of risk management and lead to improvement of credit decisions.
If so, how does the crisis affect banks? Firstly, firms that have stopped working miss out on revenues, and therefore might not be able to repay loans. Similarly, households with members who have lost their jobs or are lay off have less income, and therefore might not be able to repay their loans. This will result not only in lost revenue but also in losses (if repayment capacity is permanently impaired), negatively affecting profits and bank capital.
And as a swift recovery becomes less likely, banks can expect further losses, resulting in the need for additional provisions, further undermining their profitability and capital position. Secondly, banks face increasing demand for credit as especially firms require additional cash flow to meet their costs even in times of no or reduced revenues. In some cases, this higher demand has presented itself in the drawdown of credit lines by borrowers.
Thirdly, banks face lower non-interest/non-profit revenues, as there is lower demand for their different services. For example, there are fewer payments and transactions to be done with lower economic activity, and fewer security issues by corporate reduce fee income for investment banks.
As banks will have a critical role not only during the pandemic containment phase but also during the economic recovery phase, sufficient capitalization will be important as economies will have to reallocate resources across sectors from losers to winners. For example, sectors that rely heavily on physical provider-client contact will decline in their importance, while sectors focusing on remote and/or digital service delivery will grow.
And the long-term implications of the crisis may low profit/interest rates, close to zero, are here to stay for much longer. This will certainly put further pressure on banks’ profitability. Secondly, the trend towards digitalization might increase even further, as social distancing might become the new norm, and personal interactions between bank and client carry even higher costs and might stronger reliance on telephone and internet banking.
Thirdly, the crisis will further strengthen competition for banks from ‘fintech’ (financial technology companies) and especially big companies, such as Facebook, Google, Apple and Amazon etc. These large platform providers are likely to come out of the crisis further strengthened, with a large cash pile and in a strong position to expand into financial service provision. This might put additional competitive pressure on banks in their core business lines.
Bangladesh banking sector undergoes with a high level of Non Performing Loans and the Covid-19 shock can make banking sector’s exposure more vulnerable in handling RMG and SMEs as these are the biggest victim of the pandemic. Hence, proper caution against decline of these sectors will be a key to maintain sustainability in banking sector.
(Mr. Rashid works at Social Islami Bank Limited as Manager Operations, Certified Finance Specialist, Certified Project Management Analyst).
