The global banking system was successful in withstanding the initial impact of the shock from COVID-19. The high capital and liquidity ratios helped bolster the impact. However, this was short-lived as the pandemic strengthened, the credit growth in the banking sector came to an abrupt halt. While this was witnessed in Q1 of FY20-21, it continues to be seen even though the magnitude has lessened.

Many countries including India especially in the emerging economies, had quick responses in terms of policies that helped reduce the burden on the financial institutions by easing up restrictions and also in favour of customers by way of moratoria to avoid a complete collapse of the lending economy.

2021 remains a question yet, as uncertainty is still prevalent.

The common man or consumer, corporates, small businesses and/or MSME’s have witnessed huge increase in their debt burden owing to job loss, pay cuts, strain on their finances for medical and other reasons. Many small corporations have had to shut shop for the dire situation the pandemic had placed everyone into and states and countries going into extended periods of lockdowns so as to curb the spread of the virus.

The financial system, its robustness and stability continue to be at risk. It is hugely dependent on the still prevalent pandemic and the measures that would be taken by the authorities & government. It also rests on the consumer’s confidence around all of this to re-enter the financial system and partake in it.

The RBI has brought in new policies by way of moratorium so as to protect the vulnerable sections of society, the borrowers in the financial or lending system. Apart from the banking sector, the RBI has also brought in regulatory measures in the NBFC sector to ensure liquidity is maintained as the sector was already experiencing risk aversion from the lenders.

While the moratorium was brought in for an initial period of 3 months from March to May 2020, it was later extended until August 2020. The NBFCs witnessed MSME who had availed the moratorium mostly. While the number of borrowers who eventually availed this benefit was lower, the loan amount outstanding under the moratorium was higher.

However, by the end of H1, all was not as bad. Market confidence was displayed as loan repayments started again. H2 has also seen a lower credit demand than expected while the consumers are also displaying cash holding behaviors. The NBFCs are beginning to be optimistic as loan disbursements and collections of payments are beginning to come back to pre-COVID numbers.

As the NBFCs play a very important role in alternate banking in the Indian geographies, it is important that the RBI continues to be cautious in their guidelines to maintain their resilience so as to continue the last mile outreach by these lenders.

Over the last three years, the level of unsecured lending in the banking and NBFC sectors has increased sharply as you can see in the graph.

Source – RBI

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