REVIVAL OF THE ECONOMY POST COVID
The COVID-19 pandemic had disastrous impact on the Indian economy. It has disrupted the economy largely. According to the Ministry of Statistics the country’s growth rate went down to 3.1% in fourth quarter of the fiscal year 2020. This drop is mainly due to the outbreak of the coronavirus pandemic. Although India has been facing the slowdown in the economy before the spread of the coronavirus, the pandemic magnified the impact and existing risks for the country. The sharp unprecedented surge in the number of COVID-19 cases is slowing down the rate of India’s economic recovery. Almost all the sectors and industries have been adversely affected due to the drop in domestic demands and exports. The retail sector, for instance is crippled by local lockdowns. Tourism and hospitality sector has also been hard hit by the impacts of pandemic.
THE IMPACT ON FINANCIAL SECTOR :
The financial system, which is dominated by the BFSI sector has also not been in a healthy state. Lower incomes, fall in demands, production shutdowns are some of the major factors affecting the business of the banks. The situation even exaggerated due to the shortage of staff, inadequate digital maturity and increased pressure on the existing infrastructure. The Indian banking sector in terms of size (investments and advances at ₹149.91trillion) is dominated by the government banks but the performance of these banks is not appealing. The net losses for the Indian Government banks for the year ending March 2020 was ₹250 billion, whereas, on the other hand private sector banks recorded a profit of ₹191 billion. Recently, relief measures were taken by the government to mitigate the risks arising from the COVID-19 situation, such as moratoriums on loan repayments and one time debt restructuring schemes for stressed borrowers may protect the banks and improve lower NPA ratios for the year ending March 2021. The pandemic has presented major long term and short term challenges for the insurance sector . The insurance companies are battling challenges such as operational inefficiency and procedural challenges, fall in the revenues and reduction in reserves. All this with the growing coverage requirement by the country. The market players are going facing issues such as business continuity, capital inadequacy, employee well being, infrastructure and cyber security and so on. This brings in the light the roles of reforms, policies and measures taken by the government in order to tackle the situation. But, the question is will these reforms help improve the operational efficiency and performances of the Indian Banks. Let us have a look at some of these reforms.
THE IMPACT ON FINANCIAL SECTOR :
The recent policy and trends in the Indian Financial sector are expected to improve the operational efficiency and profitability of Indian banks.
1.Consolidation of government banks: In April 2020, mega consolidation exercise in the Indian banking sector took place with a total of 10 government banks were taken over by 4 existing government banks. This consolidation has many benefits such as creating a large Capital base for higher loan growth, improved customer service and increased operational efficiency.
2.Privatization of government banks: The government is planning to privatize many public sector banks. The government may target four major banks that are not affected by mergers. These banks have higher NPA along with huge losses with low capital bases.
3.Entry of New Private Banks: The RBI suggested that the corporations to own banks; large industrial houses may be allowed to be the promoters of the banks with necessary statutory amendments.
4.Insolvency Norms: Recently the government announced, the pre-packaged insolvency and resolution process (PPIRP), to address the financial stress, especially for MSMEs. The PPIRP framework is a form of restructuring that involves the creditors and debtors to prepare an informal plan and then submit it for approval. The incumbent management typically retains control until the final settlement. This measure should reduce stress and put the firm back on track.
5.Insurance Sector: The government is proposing to sell its 25% stake in LIC in phases through public offering of the shares which will help the government support its finances after the pandemic hindered the growth.
6.Increase of Foreign Direct Investment in insurance: The government increased the FDI in insurance to 74%. In the year 2000 the permitted FDI in the insurance sector was mere 26%. This increase will help the insurance companies to augment their capital funds in order to meet the solvency norm of minimum 150%.
The COVID-19 pandemic has digitalized almost every sector of the economy. The financial sector has come a long way in terms of digitalization. The recent surge due to pandemic is in the payments field which is reshaping the business of financial services. The pandemic has made the digital transactions popular among street vendors to medium scale merchants.
Emergence of Fintech: Financial Technology also known as FinTech are the new players in the financial services sector. India has the highest fintech adoption rate globally. These organizations are responsible for delivering the financial services by incorporating technology and delivering financial services using innovative methods. These technologies are challenging the traditional methods of providing financial services. Fintech makes use of specialized software and algorithm are used to simplify the process of financial services for business users, consumers and companies.
For instance: – crypto currencies such as bitcoin
CONCLUSION :
In order to revive the COVID suffering economy and bring it back on track, institutional finance is essential. The recent trends are more tilted towards retail lending; corporate firms should initiate large capex (capital expenditure) projects for economic revival and move a step forward as risk-takers. The organizations in the financial service industry would be under stress for quite some time now because the pandemic has not totally left us. The financial institutions should work cautiously and constantly look for opportunities to grow. Strong risk management processes, robust collection policies, effective cost control measures , increased use of technology would help entities in the financial services to pass through these testing times.
