Banking & Finance sector makes up nearly 38% of total market cap of NIFTY 50. Any dent in banking sector will have serious dent on stock markets too. Ongoing COVID crises is far from being under control. It has already impacted the economy, the effect of which will be seen over next 6 -12 months. One of the sectors which is worst affected is banking & finance.
In an event organized by NCAER, Raghuram Rajan (former Governor RBI) warned about a tsunami of NPAs in the banking sector over next 6 months. That is if the government doesn’t intervene meaningfully. Even if the government pitches in with extremely constructive measures, the NPA shock will be mildly reduced, not avoided.
According to Rajan, “ Covid19 is damaging the players in the economy seriously. Households are going to be deeply starved with very low reserves. It is hard to imagine that many of them will start consuming after the initial bout of pent up consumption. So far we have seen pent-up demand. This may not be sustainable over next few quarters.”
The current economic environment in India is of lack of confidence. The confidence amongst entrepreneurs, consumers and bankers is low. According to Padmaja Chunduru, managing director (MD) and chief executive officer (CEO) of Indian Bank, the Indian banking system is in a Catch-22 situation — balancing between credit growth and bad loans. If banks don’t give credit, there is a risk of failure of organisations. If banks lend too much, lending might take a hit on the balance sheet.
Chandra Shekhar Ghosh, MD and CEO of Bandhan Bank, says “Banks are in a very critical situation as on one hand they are required to assess the credit worthiness of customers, while on the other hand they have to balance it with credit growth.”