Visionary approach can end banking industry vulnerability

The impact of the Covid-19 pandemic on banks is relatively exclusive considering other industry trends. There has been minimal shock since the pandemic struck the country more than one year ago. But banks will receive a severe blow in most of the performance parameters in the coming days. This substantial impact on the financial sector will happen at a later stage due to the nature of the operation.

The socio-economic interruption, supply chain disruption, distortion in trade, price level volatility, exchange rate instability, a surge in financial risk, shrinkage of savings, rise in expenditure, a huge layoff in other industries, decrease in sales growth in most of SMEs and corporates, lower credit growth, execution of interest rate cap, higher volume of non-performing loans, and shock in capital adequacy with a reduced asset portfolio will have a massive negative impact in the financial sector.

By the end of 2021, the financial industry might start getting the signs of sin in a distinct clarity. What are the things banks need to get a relook? What new approach does the financial sector need to adopt for a sustainable way forward? 

A forward-looking attitude in assessment and information update is needed in which new information must be incorporated into risk parameters, and it needs to be carefully scrutinised. In many aspects, credit call needs a gut feeling in terms of futuristic assumption having a 360-degree view upon the proposal.

Foresight upon respective business or industry and knowing major risk factors in it is essential. Knowing the best possible solution to mitigate the risk and keeping bank's interest safe will be the prudent credit practice.

The interrupted economic activity with a frequent lockdown at different stages and different zones in the country are having severe adversarial consequences on a steady recovery trend, and banks will have a significant increment on loan-loss provisions.

The deferment in payment with various classification-related circulars will mostly make a delay to perceive the original backdrop. But ultimately, the anticipated credit losses previously calculated upon historical data analysis will certainly need a revisit for the uncertainty and scale of the pandemic. Banks are likely to witness a massive rise in their anticipated loan-loss provision.

The capping of the loan interest rate in a free market economy, increasing classification due to the pandemic, the slower credit growth in the private sector, limitations imposed on non-funded income and fees, accumulative provision requirement, and decreased NPL-adjusted return in loan portfolio will have a direct negative impact on income margins of banks.

The ongoing situation will further squeeze banks' net interest margin and profitability. It is advisable that the stakeholders should understand the situation and make an accommodative mindset regarding the condensed bottom-line numbers.

For the consequences of rising NPLs and the upsurge of additional risk concerns in the market, banks will have to re-examine the existing loan portfolio where any growth in credit exposure might need to allocate more capital to address the higher credit exposure. The additional capital requirement will be a major difficulty for everybody, especially for the new banks and the historically problematic banks.

Even though Covid-19 has created a catastrophe in the national economy and lowered the GDP growth rate, the impact on the overall banking industry, especially on the bank-customer relationship, can be defined in a new approach that has never been recognised.

Banks, even the most decentralised and branch-centric ones, are enforced to inspire the practice of networks and online platform-based services that have never been in their premeditated priority. As the current situation is particularly complex, banks need to utilise this period by demonstrating real proximity and empathy towards their customers.

The consideration of customer service is becoming more tangible than ever before, and it is making banks even more persuaded to speed up digital transformation through associations with the fintech community. The rise of fintech in banking services seems to be more predominant in the coming days.

The importance to develop a business continuity management process has become significantly important due to the fallouts of Covid-19. The blessings of technological rejuvenation are helping us in assuring the business continuity of banks.

At present, Zoom has become an integral part of decision-making meetings keeping adequate social distancing. Board meetings and annual general meetings are taking place on digital platforms. The initiation and enrichment of automation or artificial intelligence and mobility is allowing us for an easier safeguard in case of the nonexistence of human touch.

Integration and handshake between mobile financial services and transactional banking software are getting higher in numbers day by day, proving the intense necessity of tech-biased solutions among customers.

No doubt, the pandemic's intimidation to the return, revenue, existence, and progression of banks would upset the economy at its heart. The persistence of such a blow for an extended retro may put the whole banking sector in a big crisis in the coming future.

Precaution for banks itself in all possible measures is badly required. Banks with bigger portfolios in risky segments might have a greater chance of suffering larger NPL blows.

The government and regulators should guide for short-term, long-term, and ground-breaking policy measures with a visionary approach to avoiding the upcoming vulnerable condition in the banking industry. It is needed for the sake of the whole economy.

The writer is a senior banker.