Banks are concerned with the spread of the second wave of the Covid-19 pandemic as it has not only posed a threat to human life but also adversely impacted the economy. The resultant lockdown conditions imposed in various parts of the country could impact the cash flow of the industry and businesses and thereby could put a large amount of pressure on banks as the threat of defaults could be witnessed.

Last year, the Reserve Bank of India (RBI) had given relief to both borrowers and banks by announcing a timely moratorium on loan repayments. It helped the banks keep the defaults off their balance sheets by way of temporary moratorium measures on servicing of loans, and thus asset quality of banks was not impacted significantly. But in the present grim scenario of the Covid-19 pandemic second wave faced across the country, banks will feel the severe impact of defaults in their loan book as the pandemic situation worsens.

It gives some sigh of relief to vulnerable segments economy as the RBI Governor’s Statement on 5th May 2021 highlights the resurgence of the pandemic in India and resultant stimulus measures to support various vulnerable segments of the economy. He has stated that today, India is fighting a ferocious rise in infections and mortalities, and new mutant strains have emerged, causing severe strains on the healthcare and medical facilities, vaccine supplies and frontline health personnel. The fresh crisis is still unfolding. India has mounted a valiant defence, domestically and globally, to ramp up vaccines and medical support and save lives.

Further, Governor RBI highlighted that simultaneously, shoring up livelihoods and restoring normalcy in access to workplaces, education and incomes become an imperative. As in the recent past, the RBI will continue to monitor the emerging situation and deploy all resources and instruments at its command in the service of the nation, especially for our citizens, business entities and institutions beleaguered by the second wave. The devastating speed with which the virus affects different regions of the country has to be matched by swift-footed and wide-ranging actions that are calibrated, sequenced and well-timed so as reach out to various sections of society and business right down to the smallest and the most vulnerable.

Accordingly, a host of measures have been announced on 5th May by Governor, RBI, providing relief to various sections of society and vulnerable business like MSME and small business in the shape of Resolution Framework 2.0 for Covid related stressed assets of individuals, small businesses and MSMEs.

However, the stressed assets in the large industry / business segment call for some innovative measures to preserve the assets and keep them as going concerns for obvious reasons. The RBI has assessed the non-performing assets (NPAs) situation in the country in the latest Financial Stability Report (FSR) of January 2021. The report indicates that in the initial phase of the Covid-19 pandemic, policy actions were geared towards restoring normal functioning and mitigating stress, the focus going forward being oriented towards supporting the recovery and preserving the solvency of businesses and households. Bank credit growth has remained subdued, with the moderation being broad-based across bank groups. Macro stress tests incorporating the first advance estimates of gross domestic product (GDP) for 2020-21 released on 7th January 2021 indicate that the GNPA ratio of all SCBs may increase from 7.5 percent in September 2020 to 13.5 percent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 percent under a severe stress scenario which is already building up now. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.

To read more, please subscribe.