Potential implications of COVID -19 on the banking sector’ Financial institutions need to evaluate, test and implement business continuity and contingency plans along with building business innovations and operational flexibilities.
The government and the regulators have responded by providing an economic stimulus package with several measures to shore up liquidity and provide forbearance on several financial and compliance commitments. Institutions particularly financial have taken responsive measures to this pandemic and aim to reduce in-person interactions, downsize operations while providing financial support to retail and institutional customers.
Assessing The Impact
The pandemic is impacting the financial services sector in multiple ways — from business continuity issues and operational considerations to the overall financial outlook. As financial services companies are mobilizing and taking steps to minimize these impacts, they will likely face short- & long-term implications on both profitabilities as well as balance sheet items.
Amid the highly uncertain situation due to the pandemic, financial institutions need to stress test their portfolios, for each of the defined scenarios, to better understand the impact. The economic and market environment warrants additional stress testing that will have direct implications for decisions that these financial institutions make in real time. Identifying sectors/regions/clients that are most at risk and re-evaluating the loan loss provisions under different economic scenarios will be essential.
A continued spread of the pandemic and its aftermath will significantly slow down business, hence financial institutions must take additional measures to ensure business continuity to continue to remain relevant to their customers. Banks and financial institutions must prepare for scenarios that might occur post the lockdown period as well. This would be essential in developing a flexible contingency plan that best equips the banks for crisis management and provides supportive solutions to its customers.
The current challenges are likely to translate into high capital infusion requirements for the FIs to maintain both regulatory capital as well as growth capital.
While the long-term implications of the pandemic for the Indian financial services sector is unknown, when normalcy returns, banks, and NBFCs will likely have learned a few lessons. These may include how to best retain operational resilience when confronted with future pandemics, and possibly how to redesign new operating models such as alternate work arrangements and innovative ways to interact with customers in a remote set-up. Furthermore, the pandemic may further accelerate migration to infrastructure of the future – digital channels and connectivity.
“Flattening The Curve” With Rapid Responses
From a financial institutions’ perspective, flattening the curve implies showing resilience by minimising disruptions and ensuring that the financial impact of the pandemic is mitigated over a longer period. Beyond the operational actions already underway, financial services industry players need to actively consider the short, medium, and long-term operational, financial, risk, and regulatory compliance implications resulting from the continuing uncertainty around the pandemic. Banks and financial institutions must re-analyse their business models and plan for different scenarios.
Financial Institutions need to plan for a multiple scenario till operations are normalized keeping both their customers as well as employees needs at the centre of their businesses. It is expected that the government stimulus will plan to address the broader economic challenges.
There will be disruptions and delinquencies, however these challenges will open up choices for deepening customer relationships, investments in technology of the future, shift in mind-sets to truly adopt and execute future of work.
Financial institutions need to evaluate, test and implement business continuity and contingency plans along with building business innovations and operational flexibilities.
Institutions that take sensitive measures to ensure customer and employee reliefs, will be able to truly differentiate and eventually grow and sustain themselves. In summary, times will be tough but by adopting a vigilant short, medium and long-term action plan, financial services players will emerge from this crisis as stronger, confident and socially responsible institutions.
Institutions which use the downturn to sharpen their business models are likely to gain more from the impetus which the government stimulus is likely to provide.
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