How is Coronavirus Disease 2019 (COVID-19) impacting the BFSI industry

Covid 2019 has literally shaken the world, it has slowed business down, it has hit a pause on our economy and impacted all the sectors you can think about. The most impacted is the financial sector, this perhaps could be the most serious challenge faced by banks and NBFC’s.

The after impacts of COVID-19 will be even more severe – fall in demand, slow down in production, cash crunch, lower incomes will impact banks the most. The situation is exacerbated by inadequate digital know-how, shortage of skilled staff, pressure on existing infrastructure as banks will scramble to deal with COVID-19.

In nearly a century we have never faced any such pandemic situation, so we are obviously not prepared to deal with its severities. But we are doing our best to understand the most impacted areas in the financial world and crafting plans to mitigate risk. We need to create a small, medium, and long term goals to be able to sail through this pandemic successfully.

In this blog, I will share my thoughts on the areas more impacted in the financial arena and also share a solution to minimize those impacts. Like every grey cloud has a silver lining, here I will also be sharing some positive outcomes of this pandemic. This will change the face of banking like never before. The path ahead is a precarious one so without further ado let’s begin!

Table of Content -:

  1. Spike up of bad-loans for the private sector banks
  2. A steep surge in Digital and Open Banking services
  3. Bank stocks have been among the hardest hit
  4. Steps banks can take to ward off high risks

Spike up of bad-loans for the private sector banks

“Here is the analysis – Bad loans could rise to 10.5% of total loans in September 2020 from 9.3 5in September last in the worst-case scenario of `severe stress.’ In the case of`medium stress,’ it could climb to 10.2%, forecast from the Financial Stability Report released in December shows [as stated by The Economic Times]”

Economic growth is bound to fall to 2.9% in this fiscal year. Perhaps if this lockdown extends further we might see a deep steep dip in this growth rate. 

With almost all sectors laying off employees, and salaries been cut it will become difficult for people from the masses level to repay their loans which will result in a pile-up of bad loans and throw the economy out of gear. 

There will also be a case where people might end up taking loans and not being able to pay back because there is no light seen at the end of this dark tunnel at least for a year.

How can bad-loan pileup risk be mitigated?

Using Artificial Intelligence! Yes, technology is our ray of hope in distress. Applying machine learning solutions can help banks minimize losses to defaulted accounts. 

Lending at its core is a big data platform making it a perfect suit for building machine learning predictive models. In these times I believe banks must leverage ML to determine the right recovery strategies – in-house recovery process, the delegation of recovery to collection agencies, or sale to third parties at a discounted price. 

Lending Club: Predict Bad Loans to Minimize Loss to Defaulted Accounts

Bank stocks have been among the hardest hit

Moody’s slashes India’s growth forecast to 0.2% for 2020!

The National Stock Exchange’s Nifty Bank index has fallen about 41% so far this month, outpacing the 26% rout in the broader Nifty 50 gauge. – Financial Times

Even the largest bankers like Axis Bank, IndusInd Bank, and even YES Bank for that matter have dipped as low as 60% of their entire value over the past month. A month back India was recovering for the hard-hit YES bank fall out before we could even recover COVID-19 took over. 

The ratio of gross non-performing assets at Indian banks rose to 11% in 2018 from about 2% a decade earlier, before starting to ease off. And not this is bound to rise further, at a rate we might not even want to think off. 

With this big blow, it is indeed a good opportunity for investors to bet high on these shares and benefit from this dip in the long run but it definitely not a good indication for our economy for the short and medium-term. 

A steep surge in digital banking services and offerings

Banks are rapidly adopting appropriate digital technology enablers and pinning their hopes on automation and artificial intelligence to achieve a reduction in cost. I recently read an article that said – mobile money is widely becoming popular in West Africa because people are hesitant to exchange physical currency. This is in the reflection of the fact that viruses can potentially be transmitted by living on cash itself.

This opens doors for banks across the world to spread their wings and adopt digital technologies. The banking industry should now see perfect sync with mobile carries as mobiles are bound to be the next-gen banks. 

This also paves the way for open banking to become a sensation. Data aggregation becomes critical for open banking to function as it acts as a connecting point between banks, consumers, and businesses. MoneyGram recently launched a service that allows anyone in the U.S. to send up to $10,000 to anyone in Spain or the Philippines using Visa Direct, we will see these type of services surging in the near future. 

Steps banks can take to ward off high risks

I am sure if banks consider these steps they can emerge champions, both in terms of containing the spread of the virus and also maintaining their rhythm in the market.

  1. Draft a business as a usual plan for survival: Step-up and support social distancing in banks and shut down excess real estate capacity [reducing branch footprint] Probably have an appointment system so that there is a caping on the number of people visiting the branch on that particular day.
  2. Automate as many routine and mundane tasks as possible. This will reduce costs and improve efficiency. Banks can allocate a budget to implement AI and ML solutions to not only automate but also derive intelligent insights from it as it has more number of digital transactors than physical transactors.  Adopting ACT21 Softwares Disruptive digital technologies such as analytics, mobility, and cloud will revolutionizing internal processes and enhance customer relations. 
  3. Evaluate client refinancing deals against your balance sheet strategy. You’ll want to consider how government stimulus may create lending opportunities and change profitability measurements
  4. Cut costs as much as possible in every possible area – be it marketing, IT, operations, LOB, procurement, etc. 
  5. Using AI and ML for instantly Remodeling Credit and Implementing Policies, Fraud Detection, Debt Scoring, Bad Credit Detection, Customer Churn Prediction, Debit Reduction, Increasing Marketing Campaign Effectiveness, and more. H2O.ai for Financial Services.
  6. Incentivising sales and third-party agency compensation using automation. Being able to change and implementing policies regarding incentives instantly will act as a motivator for stake-holders to push their limits. 

As per our research – organizations can drive 55% more sales if their incentive plans are in sync with the market conditions. 

For example – during Ganesh Festival in Mumbai, India the sales are recorded to be the lowest but during that time companies use automation to quickly remodel their policies and give higher incentives to employees the result of which is an assured spike in the overall sales.  Disruptive Incentive Compensation Solution

With these simple measures with and without technology, banks can pull themselves out of this catch 22 situations.

Conclusion

Rate cuts, as well as a decrease in total demand, will have a severe top-line impact on banks. Misaligned revenues and cost will force banks to think off the radar and adapt lean techniques to improve operational efficiency and flexibility. Banks will grapple to even more severe challenges in the future but whatever may be the outcome of COVID-19 they will surely learn a lot more about their customers, their potential, and the overall market they operate in. 

I hope I could provide you with some nuggets on insights as well as some solutions. As your trusted business partner we are always ready to provide you with any assistance and support you might need in this time of crisis, reach out to us as you reach out to a friend. 

Let me know how you found these insights to be in the comments section below, I would love to read and respond to them.

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