Low demand, lack of manpower, stuck working capital, and lack of capital may lead to further stress on employment.Prime Minister Narendra Modi will today join a brain-storming session with stakeholders of banks & NBFCs. Amid a deteriorating credit profile of banks, PM Modi will discuss and deliberate on vision and roadmap for the future, said the Prime Minister’s Office. The main topics on agenda include credit products and efficient models for delivery; financial empowerment through technology; and prudential practices for stability and sustainability of financial sector. “Highlight of the discussion will be to boost growth through effective delivery of credit to different sectors of the economy,” Sameer Narang, Chief Economist, Bank of Baroda, told Financial Express Online.
Even before the coronavirus pandemic, the Indian banking system was struggling through low credit offtake despite multiple rate cuts by the Reserve bank of India. The wound deepened after the nationwide lockdown as the credit offtake further slowed down. Credit growth of the scheduled commercial banks, which had considerably weakened during the first half of 2019-20, slid down further to 5.9 per cent by March 2020 and remained muted up to early June 2020, said the RBI’s Financial Stability Report.
Consequently, the MSME sector is affected because of a lack of cash flows. Low demand, lack of manpower, stuck working capital, and lack of capital may lead to further stress on employment. Potential margin compression in corporate bonds was also seen as increasing leverage, leading to a negative impact on credit metrics and consequent rating downgrade that can result in difficulties for refinancing of loans and raising capital, the RBI FSR added.
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In these challenging times, when businesses need capital support, the banking sector plays an important role in contributing to India’s economic growth through financing infrastructure, agriculture, local manufacturing including MSMEs. Financial inclusion can play a big role in financial empowerment through technology, the PMO added.
Meanwhile, the woes of India’s commercial banks don’t seem to fade away anytime soon as the RBI has projected that NPAs may shoot up in the coming months. In July’s Finacial Stability Report, the central bank showed that the gross NPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. It added if the macroeconomic environment worsens, the ratio may further escalate to 14.7 per cent under the very severely stressed scenario. Responding to the projections, RBI Governor Shaktikanta das said that financial sector stability is a prerequisite for giving confidence to businesses, investors, and consumers, thus, banks have to remain extremely watchful and focused.
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