Understanding the impact of COVID 2.0 on the financial sector

05 May, 2021

7 min read

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covid 2.0 effect on Financial Sector - Smart Money
When the COVID pandemic struck India last year, Sensex plunged from the 45,000+ levels right to sub-30,000 levels within a matter of five weeks.

Understandably, businesses were forced to shut down, citizens were locked within the confines of their homes, and economic activity was subjected to a screeching halt. In this process, all sectors of the economy were severely hit - and the banking and financial services sector was no different. It’s 2021 now, and the pandemic has once again caught the Indian economy under its grip. Is there anything different this time around, and how will the banking and financial services sector be impacted this time around?

What happened last year?

At the onset of the pandemic, the banking and financial services sector was one of the first to respond to the fast approaching slowdown - and BANKNIFTY lost over 43 percentage points over a matter of a month. And since then, it took almost a year for the index to regain its 30,000+ level. The recovery was sluggish to say the least. When the pandemic was starting out, CEOs and CTOs of leading banks were advised to digitize their operations in order to resume banking services despite the lockdowns and social distancing measures. However, such measures take a long time to implement, and a country like India where the reliance on physical branches and in-person transactions has been critical to those with low levels of digital literacy and for building trust, digitization only contributed to a small part of the recovery. 

What’s happening now?

Compared to the toll that the pandemic took on India last year, this year looks starkly different. The rise in the number of cases has been multiple times faster, and the curve has shown no signs of flattening until now. What’s more, 80% of cases come from areas that contribute to 45% of total loans that the banking sector has disbursed as of now. In addition, the situation looks far worse in urban areas, where economic activity and pent-up demand had until now, been regaining and releasing steadily. To add up these factors to a GDP target that has been forecasted at 12.8% - accounting for a slowdown in the second quarter, the banking and financial services sector might take a plunge in the coming weeks. But until now, BANKNIFTY has continued to outrun its past highs, and remains at 33,000+ levels at the time of writing. So why has the market remained calm, and even hopeful despite an alarming situation in the country?

BFSI Outlook for COVID 2.0

Analysts think that the markets are yet to react to the impact of COVID 2.0 on the BFSI sector. As most banking and financial services stocks remain at their post-recovery levels, the market continues to revel in the impetus of a sluggish recovery that most sectors were exhibiting before the 2021 lockdowns. Some thought leaders have also suggested that the impact of the pandemic and the lockdowns in COVID 2.0 will probably be much more modest and subdued in comparison to what was observed in 2020. The reason for this being that a year-long struggle with the pandemic has taken away from the novelty of uncertainty that was harking at the markets in 2020 - additionally, businesses have been stress tested to their limits in Lockdown 1.0 - with digitization and business under distancing conditions, economic activity has more or less continued despite the pandemic. This leaves a rather positive expectation with the retail and enterprise borrowers, and the speed with which the market will return to normalcy once the country has gained an upper hand on the pandemic.

Non-performing assets: a cause for concern?

Despite the hope and expectations from the market, the country’s composition of non-performing assets presents a legitimate cause for concern. According to the 12th banker’s survey earlier this year, NPAs are expected to rise to 10% over the first two quarters of 2020. Yet another report by RBI suggests that the number could be somewhere around 12.5%. This is hardly surprising, as most of the NPA contribution comes from tourism, aviation, hospitality and restaurants and dining sectors, with over 80% respondents confirming an increase in NPAs from these sectors. At the same time, sectors like pharmaceuticals, infrastructure, logistics, and food processing indicate an increase in demand for long-term credit. How these opposing forces will play out in the portfolios of BFSI institutions is only a matter of time. 

What next?

Most intelligence units from leading institutions like Mckinsey & Company, EY and BCG suggest that the key to forecasting economic recovery trends for India, is to look at how the second wave has played out in other countries, which are already past their respective COVID 2.0 curves. If the recovery is W-shaped, then the demand for credit from the corporate and MSME sections is likely to rise by the last quarter of 2021. However, agility within the BFSI sector’s financial and operations teams will be critical to navigating the challenges that COVID 2.0 will throw at the business. 

Those that are looking to invest in the BFSI sector must conduct a thorough fundamental and technical analysis and extrapolate from the trends that 2020 had unveiled to the market. While the plunge might not be as deep this time around as it was last year, a well-timed entry might make a big difference in the long-run. 

To learn more about the markets and how they respond to events in real time, check out our other blogs - or visit www.angelbroking.com for free market intelligence!

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