Question

Discuss financial institution distress during the financial crisis.

Answer 1

Due to the pandemic of Chinese viruses, the banking industry has been hit hard.

Market failure will soon arrive in India and a systematic failure will happen if the crises are not managed properly by Central bank and Government. With companies going sick, many jobs will be lost. As a result, the total demand in the country would see a hit and the banking sector would not be able to generate new loans.  

For example:

The government of India has declared a 6-month relaxation of the baking sector in which people having debts are given extended periods of time to pay of their debts. This will affect the liquidity position of the Banks as they will not be able to recover as much dues from people as they expected and would run into losses. Reduced Liquidity and market failure will increase the crises.  

Banks run on assets and liabilities. The risk of default is high during this period and NPA reports will rise. It would curtail the total assets for a bank. There is also be large withdrawals during this period and liabilities towards payment is seeing a sudden increase. It will increase the ALM risk many folds and will cause widespread issues for the banking sector.  

Taking into fact that revenues will slow down for the next this year, operational risks will also arise. With lockdown and social distancing in place, Companies and even banks are finding it difficult to manage their business and employees. Managing an entire bank with millions of transactions daily is going to be a very difficult task.  

If the world continues to see a rise in Chinese virus cases, the lockdown across the globe may extend. As a result, the global recession will come. This will lead to a situation wherein a cyclical recession will take place in the economy. Value of real estate may go down significantly and collateral assets held with the bank will reduce in value. As a result, widespread problems would arise for the economy and the banking sector.