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Finance Project

COVID-19 has significantly impacted the banking sector through disruptions to physical operations, deteriorating asset quality, and increased demand for digital services. The Reserve Bank of India took several measures to support the economy and banking system by cutting policy rates, providing loan moratoriums, reducing cash reserve ratios, and injecting additional liquidity. Banks face challenges like increased savings deposits, slower loan growth, and potential worsening of non-performing assets. The long-term impact on banks will depend on how quickly economic activity normalizes after lockdowns are lifted.

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31 views

Finance Project

COVID-19 has significantly impacted the banking sector through disruptions to physical operations, deteriorating asset quality, and increased demand for digital services. The Reserve Bank of India took several measures to support the economy and banking system by cutting policy rates, providing loan moratoriums, reducing cash reserve ratios, and injecting additional liquidity. Banks face challenges like increased savings deposits, slower loan growth, and potential worsening of non-performing assets. The long-term impact on banks will depend on how quickly economic activity normalizes after lockdowns are lifted.

Uploaded by

Darshan Dube
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SYBBA-REG(FINANCE)

NAME: DARSHAN SUNIL DUBE(9868)


MAHESH BHUPATI(9902)
EFFECTS OF COVID-19 ON BANKING
SECTOR
INRODUCTION:
COVID-19 is in the first place, a pandemic with potential
serious implications for people‘s health. It is an
unprecedented challenge for our modern societies and
health systems. The consequences of the pandemic for our
global economy and financial sector are unpredictable.
Economists are convinced that we are heading for a
significant economic downturn; however, responses from
Governments and Supervisors have been prompt and
different measures have already been taken to sustain the
economy, the banking sector and, ultimately, the people.
OBJECTIVES:
COVID-19 has led to significant structural and behavioral changes in the form of social
distancing, drive for economic rejuvenation, and increasing regulatory and government
interventions.
These changes, such as disruptions to physical operations, impact on asset quality and
liquidity, and demand pressure on digital channels, have posed challenges to financial
institutions across key functions.
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.
Some decisions taken by RBI to counter
the corona virus impact on economy
1. Repo Rate - RBI announced that it was cutting the Repo rate by 75 bps, or 0.75% to 4.4. the Repo rate was earlier 5.15;last
being cut in October 2019

2. Reverse Repo- The regulator also announced that it would cut the reverse repo rate by 90 bps, or 0.90%. on a daily average ,
banks had been parking Rs 3 lakh crore with the RBI. The current reverse repo rate was 4 %.

3. Loan Moratorium - In a massive relief for the middle class, the RBI Governor also announced that lenders could give a
moratorium of 3 months on term loans, outstanding as on 1 march , 2020. This is applicable to all commercial banks including
regional , rural, small finance, co-op bank, all India financial institutions and NBFCs including housing finance and microfinance
4. CRR- The RBI also announced that the cash reserve ratio would be reduced by 100 bps, or 1% , to 3%. This would be
applicable from March 23, and would inject Rs.137,000crore.
5. LTRO -The RBI will also undertake long term Repo operations; allowing further liquidity
with the banks. The banks however are specified that this liquidity will be deployed in
commercial papers, investment grade corporate bonds and non -convertible debentures.

6. Ease of working Capital financing- Lenders were allowed lending to recalculate drawing
power by reducing margins and / or by reassessing the working capital cycle for the borrowers.
The RBI also specified that such a move would not result in asset classification downgrade.
7. Working capital interest -A three month interest moratorium shall also be permitted to all
lending institutions.

8. Deferment capital interest- The net stable funding ratio, which reduces funding risk by
requiring banks to fund their activities with sufficiently stable sources of funding was postponed
to October 1, 2020. The NSFR was earlier supposed to be implemented by April 1, 2020.

9. MSF- Marginal standing facility has also been increased to 3 % of SLR, available till June
30,2020. This measure should provide comfort to the banking system by allowing it to avail an
additional 137000 crore of liquidity under the LAF window in times of stress at the reduced said
the RBI.

10. Fresh Liquidity - The impact of all the announcements today shall inject almost 3.2% of
GDP, the Governor said in his brief today. The RBI also added that since February 2020 it had
injected Rs 2.8 lakh crore of liquidity , equivalent to 1.4 percent of GDP.
Other Impact:
1. An epidemic like corona is likely to result in a major shift in savings and risk to
households.
This increase can increase the flow of savings in bank deposits among the instruments
of savings,
which are always considered safe

2. An epidemic like corona may increase the demand for loans from banks, slowing
down secured lending like personal loans or credit cards.
Conclusion
The impact of the corona like epidemic on banks in India has left some banks to struggle due to
deposits, as loans are protected by deposits. The condition of private banks may force customers
to lend less, which may lead to poor liquidity. The RBI has given a 3 month grace period to all
banks due to corona which has brought some relief from the rules governing bad credit
recognition , but banks NPA have increased. It is well known to the bankers that since the
implementation of the lockdown by the government of India on 25 March,2020 RBI has taken a
lot of steps in doing business in the banking sector. RBI has also relaxed the deadline for bad
credit rules due to corona and barred borrowers from paying dividends for the year ended 31
march 2019. The situation of Banks has deteriorated due to the lockdown. But now after
withdrawing the lockdown it will take longer to return to normally.
References
1-https://www.researchgate.net/publication/351933889_covid-19_impact_of_banking_sector

2-https://www.cxotoday.com/news-analysis/covid-19-and-its-impact-on-indias-banking-sector/

3-Youtube

4-Wikipedia

5-Books and newspaper articles.

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