“Banks must inculcate sustainability & contingency planning”

Dr Arindam Bandyopadhyay, Associate Professor (Finance) & Associate Dean, National Institute of Bank Management (NIBM) tells TPCI in their exclusive interaction that if India’s human resources are protected, the economy can be re-build and revived. He looks at PSBs as the key players in ensuring rapid support to the economic sector. He opines that the efficient allocation of scarce capital and understanding of its linkage with the business planning will help the bank to survive in the long run.

TPCI: What is your persective on the economic and business challenges that India faces amid the COVID-19 crisis? How is it expected to impact the financial institutions in the country?

Dr Arindam Bandyopadhyay (AB): The world is in a pandemic crisis. States, multilateral organizations and policy makers globally are in need for strategies to fight, cope with and ease the pandemic as well as protect their societies and economies. The Indian government as well as RBI have acted proactively to combat the spread of the coronavirus, which has damaged the global economy.

Increased public investment in improving domestic infrastructure, focusing on indigenous industries like production medical equipment, medicines and medical facilities, will create sectoral growth. The merger of banks and recapitalization of state-owned banks and easy access of credit to corporates as well as small and medium enterprises will enable the firms to cope with sectoral stress. The Indian government has rolled out a Rs 1.7 lakh crore relief package, in an attempt to limit the economic damage caused by the COVID-19 outbreak and tackle loss of livelihood of millions of poor hit by the unprecedented lockdown. One of the greatest strengths of India is its human resources. If human resources are protected, the economy can be rebuilt and revived. Government has made task forces and is taking suggestions from reputed economists to look at ways to restart business operations post lockdown and revive the economy.

TPCI: While the RBI has taken a number of positive measures to inject liquidity into the economy and address the woes of the corporate sector, the same may not be necessarily true in terms of passing them on to customers by the private sector banks. What is your take on this?

AB: Yes, the government and RBI have taken a series of steps to address the crisis. In order to ensure enough liquidity in the system, RBI has been systematically injecting liquidity into the banking sector through open market operations and through their liquidity adjustment facility. RBI has also extended the moratorium by another three months on payment of installments of all term loans outstanding as on March 1 to help mitigate the hardship faced by the borrowers. The emergency financing by banks, FIs as well as global agencies can ensure rapid support to the economic sector.

TPCI: How do you view the role and importance of public sector banks in the present scenario?

AB: In the crisis period, our public sector banks have actually given good support to the government. Historically, the largest PSB in India has provided liquidity support to some leading larger private banks when they were in trouble. We have now understood that there is a need for public sector banks who do not thrive for profit. Some large PSBs are giving emergency credit with minimal requirements to help the industry. Besides banks, NBFCs and MFIs also play critical role in financial intermediation. Recently, central bank has also announced a special liquidity facility of Rs. 50,000 crore for the mutual fund industry to avert spread of contagion effect.

TPCI: Customers have become quite skeptical about using ATMs owing to the possibility of transmission of the virus through currency notes. How can AI be used to address this?

AB: There are alternate methods of payments –

(i) Unified Payments Interface (UPI) which is an instant real time payment system. It enables customer to transfer money from multiple bank accounts to any bank using a smartphone.

(ii) Google Pay-can be accessed through mobile phone. Many grocery or kirana shops are accepting this mode which is linked to google account. In google pay, customer will have to add balance to the wallet.

(iii) Similarly, PhonePe method directly debits the amount from the customer’s bank account.

Use of Artificial Intelligence (AI) does not appear to be feasible for cash handling in immediate future. Robots can be used for cash handling like in hospital wards, but this is applicable in developed countries. AI is useful for banks to understand the customer’s payment and product needs; analyze their credit behavior and credit quality.

Recently a variant of ATM-cum-Debit card has been approved by RBI, which is touch less for COVID-19. The purpose is to make transactions safer and contact free. Under this new technology, consumers will be able to pay by simply tapping their cards. Many US consumers are already using contactless payment to meet their grocery needs. However, payment service providers need to upgrade the technology at their end.

This pandemic will enable us to understand the utility of digital payment system. In the current age of information technology, India  is making rapid progress in the field of payments. Banks are utilizing those avenues to reach out the customers. For businesses, financial service providers, and governments, digital payments and digital financial services can broaden the digital infrastructure and unlock significant productivity gains. The product needs to be marketed effectively, be easy to understand, come from a trusted provider, and largely reflect existing consumer behavior.

TPCI: What mechanisms can be utilised to boost lending and drive economic growth in the aftermath of COVID-19?

AB: Risk aversion will come down since due to crisis, customers will have more trust on larger PSBs. Credit enhancement mechanisms such as providing credit guarantee/insurance for improving credit rating of borrowers will encourage banks to take lending decisions. Provision of interest subvention (in the form of waiver of some percentage of interest in lending to specific segment), capital infusion, easing of the bank’s provision burden by extending moratorium period, reduction in risk weights in SME segment may push the credit growth. However, internally, banks will have to sharpen the risk measurement techniques using various data analytics to take conscious decisions. Banks should be allowed to take strategic decisions. Risk management doesn’t mean you don’t take risk.

Banks play important role in financial intermediation process in India. For revival of growth, industry requires bank finances. There is a need to keep credit flowing to all economic agents to overcome the crisis period. Many public sector banks have introduced emergency credit lines where a maximum loan amount up to Rs 200 crore or 10 percent of the existing fund based working capital limits can be availed by Medium and Small Enterprises. There is no collateral or paper work required to get sanctions. MSMEs can be incentivized to produce medical equipments & products with government support.

TPCI: What will be the critical factors defining success/failure of banks in the post crisis period?

AB: The core business of the bank is lending. If they continue to do the business more diligently and improve lending skills, banks will be able to sustain their business and maintain solvency. Efficient allocation of scarce capital and understanding of its linkage with the business planning will help the bank to survive in the long run. Management of asset quality and liquidity risk would be crucial for post COVID-19 business planning. Banks need to emphasize on business sustainability and contingency planning. It should be embedded in their business policy as well as practices. Risk management makes bankruptcy less likely, by making senior management aware of the volatility of overall cash flows.

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Dr Arindam Bandyopadhyay, Associate Professor (Finance) & Associate Dean, National Institute of Bank Management (NIBM) is actively involved in teaching, training, research and consultancy in Risk Management (especially, Credit Risk Management, Basel II IRB and ICAAP). He has great interest in empirical research in the area of Banking & Finance. He has also served as the editor of PRAJNAN-The Journal of Social and Management Sciences.