Question

How can banks protect the interest of all stakeholders affected by the Covid-19?(e.g. borrower，shareholder，depositor）

And does this outbreak affect bank's liquidity？

Answer 1

Introduction:

As a bank its main priority is to protect the health of our employees, customers and shareholders, while also contributing to the protection of society as a whole. This is particularly important today with the coronavirus (COVID-19) pandemic facing the world. As per geographies contingency plans operate to contribute to the public well-being.

COVID-19 affects on Stakeholder:

1. Governments proposed Moratorium on Term Loans.

In India All commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) (“lending institutions”) are being permitted to allow a moratorium of three months on payment of installments in respect of all term loans outstanding as on March 1, 2020.

Accordingly, the repayment schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.

In Spain Banks proposed Up to 12 months mortgage repayment holiday and up to 6 months for personal loans.

2. Help contractors to maintain employment, covering the cost of wages for the most vulnerable providers.

3. Banks exempts individual micro-entrepreneurs from paying a two-month bank fee.

4. The retail network is offering temporary payment suspension, and refunding some fees, and suspending mortgage and home equity line of credit foreclosures.

5. Reinforcing monetary transmission so that bank credit flows on easier terms are sustained to those who have been affected by the pandemic.

6. Providing High interest rates on Fixed Deposit, bonds paper and schemes for the encouragement of depositories for atleast 1 year investments.

How COVID 19 outbreaks affects Bank Liquidity:

Alongside liquidity measures, it is important that efforts are undertaken to mitigate the burden of debt servicing brought about by disruptions on account of the fall-out of the COVID-19 pandemic. Such efforts, in turn, will prevent the transmission of financial stress to the real economy, and will ensure the continuity of viable businesses and provide relief to borrowers in these extraordinarily troubled times.

Recovery Tools from COVID 19 Outbreaks:

1.) Cash Reserve Ratio

A. Liquidity in the banking system remains ample, as reflected in absorption of surpluses from the banking system under reverse repo operations, It is observed, however, that the distribution of this liquidity is highly asymmetrical across the financial system, and starkly so within the banking system.

As a one-time measure to help banks tide over the disruption caused by COVID-19, it has been decided to reduce the cash reserve ratio (CRR) of all banks. This reduction in the CRR would release primary liquidity uniformly across the banking system in proportion to liabilities of constituents rather than in relation to holdings of excess SLR. This dispensation will be available for a period of one year .

B. Furthermore, taking cognisance of hardships faced by banks in terms of social distancing of staff and consequent strains on reporting requirements, it has been decided to reduce the requirement of minimum daily CRR balance maintenance effective from the first day of the reporting fortnight beginning end of this financial year. This is a one-time dispensation available up to next financial year.

2.) The funds that banks have borrowed from RBI through the targeted long-term repos are finding their way to only top-rated companies, This means that risk aversion will become second nature for bankers. The surplus liquidity would remain within banks with no route to flow out.

3.) Easing of Working Capital Financing : In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms permitted to the borrowers to specifically tide over the economic fallout from COVID-19 will not be treated as concessions granted due to financial difficulties of the borrower, and consequently, will not result in asset classification downgrade.

4.) Implementation of Net Stable Funding Ratio (NSFR) : As part of reforms undertaken in the years following the global financial crisis, the Basel Committee on Banking Supervision (BCBS) had introduced the Net Stable Funding Ratio (NSFR) which reduces funding risk by requiring banks to fund their activities with sufficiently stable sources of funding over a time horizon of a year in order to mitigate the risk of future funding stress.

CONCLUSION

Despite government guarantees for (some) corporate borrowing and more direct help in covering staff costs, many businesses will fail as a result of the COVID-crisis, and many that survive will be financially damaged. The banks that lend to them are sure to suffer not only credit losses but forgone revenues from the collapse in business activity.

But this is not a reason for fatalism. Such crises can be managed better or worse, not only in minimizing the losses that result from it but in positioning for success once the effects of the crisis have subsided. Banks can succeed in financial and socio areas, prioritized will give themselves the best chance of getting through this crisis and prospering on the other side.