Context: The COVID-19 pandemic is considered to have a significant impact on India’s financial sector.

Analyzing the status of India’s financial sector in relation to pandemic

  • Before the COVID-19 pandemic, the Indian financial sector was already in a vulnerable state. 
  • India had one of the highest percentages of gross non-performing assets (GNPAs) among major economies. 
  • Also, the liquidity crisis triggered by the Infrastructure Leasing and Financial Services default continued to impact the non-banking financial company sector, while a high level of corporate credit defaults resulted in a contraction of available credit. 
  • On the other hand, the retail sector, with private banks, in particular, showed strong growth in segments like personal loans.
  • Prior to COVID-19, the low- and lower-middle-income classes were the key consumption drivers of the economy, accounting for 66% of India’s total consumption.
    • Also, the same households are the population most meaningfully impacted by the pandemic.
    • On the other hand, high-income and upper-middle-income households account for 64% of the savings, where the impact of the pandemic is likely to be more mixed.
  • Lack of investment demand and uncertainty in the business environment are likely to cause a considerable decline in loan growth in FY21.
  • Impact on population in the middle of the income pyramid
    • This will ultimately have a significant negative impact on the following sub-segments and asset classes: MSMEs, unsecured debt, urban microfinance, and commercial vehicles, including first-time users, as well as first-time buyers.
    • Corporates are also expected to be hard hit given the slowdown, resulting in rising defaults. 
    • GNPAs, which had just started to decline, may see an increase again.

Way ahead for the Indian financial system

  • Banks need to include aggressive NPA management measures such as stress testing of their balance sheet by putting in place early warning signals to manage the NPA situation and move towards recovery over the next 6-12 months.
    • So far, Indian banks have largely been growth and top-line focused. However, the priority now might shift to cost across their branches, contact centers, and operations.
  • Banks should deploy multiple levers towards this, including the changes in their operating model and digitization of processes. 
  • Furthermore, banks are likely to digitize large parts of the customer journey for retail, MSMEs, and corporates. 
    • In this field, they will look to partner with fintech companies and create the right ecosystem that enables digitized lending and fulfilling all needs of consumers.


Non Performing Asset:

  • It refers to a classification for loans or advances that are in default or in arrears
  • A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.
  • They are those agricultural loans whose interest or principal installment payments remain overdue for two crop/harvest seasons for short duration crops or overdue one crop season for long duration crops
  • Expected payment on any other type of loan overdue for more than 90 days is also called an NPA.


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