COVID-19 and its Impact on India’s banking sector
By Sonali Kulkarni
COVID-19 is undoubtedly one of the biggest global events of our lifetimes, presenting unprecedented challenges to many industries, governments and people all over the world. The pandemic remains a health and humanitarian crisis, and the business and economic impact has been deep and far reaching. Financial services firms, in particular, have the opportunity to help consumers and businesses weather the economic downturn and navigate the current storm.
A lot has been done already. Banks in India have focused on maintaining critical staff at branches and have temporarily redeployed staff to manage online or phone enquiries from customers. They’ve also deployed mobile ATMs and implemented doorstep banking for senior citizens and other customers that need additional attention. We expect financial firms to implement video collaboration tools, new chat and messaging software and other fintech innovations to continue live interactions with customers who have been coping with social distancing norms, with some already making use of common consumer apps to that end.
Several banks have made investments in technology and digital transformation over the past couple of years. A lot of them, however, are still heavily reliant on face-to-face interactions, supported by paper processes. So, we expect to see renewed vigor in the Indian financial services industry with banks making a concerted effort to up their digital game. This will be critical as COVID-19 is likely to have a prolonged impact, and banking touches every part of our economy.
That said, most banks have addressed the immediate challenges of COVID-19, related to protecting staff and providing much needed services to customers. They now have the chance to be active participants to help mitigate this crisis, and there are four key areas they can focus on to help navigate the current situation:
- Customer Service and Advice: As a result of social distancing, an increasing number of consumers are using online banking channels to manage their money. This is likely to result in a more permanent shift in customer preferences to digital channels and an increased demand for digital services. It’s important for banks to be accessible to all consumers, including the elderly or those not familiar with digital banking, providing education on how to use digital tools, keeping ATMs stocked and operational. As customers seek help and advice on short-term cash management and re-planning their future, banks would need to prioritize live interactions through video collaboration tools. This increase in digital customer engagement must go hand in hand with a ramp-up of cybersecurity and fraud-protection tools to protect customers.
- Credit Management: Even with the Indian government’s stimulus packages and Reserve Bank of India’s (RBI) liquidity measures, banks can expect an increase in loan defaults as borrowers across customer groups struggle to make payments in the face of an economic crisis resulting from lost business and jobs. Besides the moratorium facility announced by the RBI for all term loans, as part of the COVID-19 package, lenders should consider proactively restructuring loans to reduce the cashflow burden in the near term, thus reducing defaults in the immediate future. The industry must work together to make the financial relief process quick and easy to deploy. Banks should proactively initiate credit forbearance and modification programs using a data-driven approach to understand which customers need help and then rapidly reach out with tailored, relevant solutions. Even with these programs in place, some customers may still not be able to make their next payments. So, banks should prepare for losses and build capacity to deal with an increase in delinquent loans. As consumer demand picks up, albeit gradually, post lockdown, banks will need to repurpose their go-to-market and customer acquisition model, keeping in mind changing consumer behavior post COVID-19, as well as focus on digitally native journeys and re-look at underwriting norms for better risk discovery.
- Revenue Compression: Revenue from retail and commercial banking is falling sharply, as underlying consumption and transactions have seen an exponential dip. While central banks around the world slash interest rates, banks are reducing yields to generate business, thus significantly reducing net interest margins. Income from payments and other fee-based services are hit by a general decline in economic activity. With measures like moratorium periods provided on loans, banks’ cashflow have also taken a hit. We expect an overall drop of up to 10% in banks’ payments revenues, which means a USD 150 billion top-line decline for the industry globally, as demand in sectors like retail and entertainment falls sharply or moves to online channels, while activity in areas such as tourism and travel evaporates. There is little that banks can to do to stop the overall drop in revenue, but they can focus on making payments safer by increasing limits on contactless payment channels and educating consumers on digital wallets. Banks can also focus on cashback and loyalty rewards to encourage spending in sectors that need it the most.
- Operating Model Adjustments, Cost Elasticity and Innovation: Over the next few quarters, the banking sector will face a misalignment between short-term costs and revenues due to the economic impact of COVID-19. Banks would need to review and prioritize current projects to ensure allocation of resources to the most pressing needs. Banks should also focus on investing in areas that will outlive the current pandemic, including projects and initiatives that maintain or improve the customer experience such as a paperless utility, end-to-end digital advisory and lending capabilities, increased fraud and cybersecurity analysis and detection, etc. These new digital tools will make banks more efficient and resilient to future changes. Banks that haven’t focused on remote working and virtual collaboration in the past should explore establishing elastic operations. This will insure banks against such unprecedented lockdowns and perhaps better manage cost overheads.
COVID-19 will have long-lasting impact on many industries including banks. Post crisis, digital maturity and COVID-19 resiliency will determine strategy of banking players with three segments emerging: banks that are already future-ready with truly digital banking capabilities and cost elasticity, banks that are digital laggards and that need to evolve and renew due to sub-par COVID-19 resiliency, and lastly banks that will struggle to survive as a result of being digital laggards with sub-par financial and operational resiliency.
COVID-19 will change our behaviors as customers, citizens and employees in India and around the world. As people become more focused on their well-being, businesses will also need to understand how they can be part of a new health ecosystem that is likely to dominate customer thinking going forward. The idea that “every business is a health business” is already emerging in many corners of financial services, and that is perhaps one of the few positive lasting impacts to result from COVID-19.
(The author is Client Group Lead – India, Financial Services, Accenture and the views expressed in the article are her own)