How Coronavirus will redefine Banking and Leadership

Source :Sify
Author :Sairaj Iyer
Last Updated: Mon, May 25th, 2020, 09:21:01hrs
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The world is in a crisis, a word JFK remarked at a 1959 convocation as being composed of two - one representing danger and the other opportunity. Cut to 2020 - China, the US President and a Crisis holds itself as a Deja-Vu moment placing the world on tenterhooks. Ironically, the 45th US President's take on Hydroxychloroquine, China, disinfectants and almost everything else remains as debated as the interpretation made by JFK in 1959.

A similar paradox of interpretations can be observed in India too. Rosy forecasts amid laborers' marathon-like return journeys, excitement on the prospects of businesses moving out of China to India despite immediate joblessness... And the media's sudden shift in gaze from New Delhi to the states are immediate examples.

With Coronavirus' impact being felt across sectors, what choices are left with policy-makers? How will the virus impact the financial sector? And, how should Indian states go about in capital generation? Professor Anil Sood, Co-founder of the Institute for Advanced Studies in Complex Choices (IASCC), elaborates on the problems, the choices, and perspectives in this interaction with Sairaj Iyer of Sify.com.

Excerpts:

Sify.com: How tough is it going to get in the coming days?

Prof Sood: In the short term, I think the focus will move to managing cash-flows. The India story so far was dependent on growth numbers. For the last two quarters, corporate growth has remained elusive. With natural growth tapering, profitability followed by cash-flows are immediate casualties.

Also, you will see capacity utilization getting dented. For example, Construction, Aviation, Hotel, Tourism, Auto, ancillaries and even appliances industry will see capacities getting slashed owing to lower discretionary spends. We will also see inventory pipeline decrease although consumer product sales may not take a beating. That's only because production may not jump by a huge margin at least for the next 2 months. Overall billings may come down, resulting in a decline for revenues. Overall, I think a correction is certain in the next quarter.

Key Impact from Coronavirus:


1. Discretionary spends across sectors may slowdown.

2. Capital Intensive purchases (auto, housing, large appliances, etc.) may get delayed, even among the upper-middle income households, arising from concern about future earnings.

3. Government debt may increase: State governments add 25% of GDP to borrowings (excludes NHAI, FCI etc). However, US government' indebtedness is 100% of GDP.

4. QoQ Growth Chart:

5. Government Expenditure vs other Global economies:

France has a higher expenditure as part of its GDP, higher than even US

Source:Report - Indian Economy: Making a case for Government to play its economic role - Anil K Sood, IASCC.

Also Read: Indian businesses are demanding months of tax revenue to stay afloat


A common theme across central banks is to reduce interest rates. Are there any more options?

I think that's simply because central banks can only offer additional liquidity. In India, the RBI may have to print additional notes to support the Rupee. That, only if the govt allows fiscal deficits to increase.

The RBI may also allow more time to banks in NPA recognition. There's also a need to provide support to banks forced to increase provisions owing to higher NPAs. Then there's the NBFC contagion which may result in a bigger cushion. Speaking of PSU banks, the government will have to rework in ensuring higher equity (tier 1 and tier 2 capital) to enable PSUs to increase provisions to address the jump in NPAs.

The RBI recently revised the WMA policy. Will the RBI allow more financing for states? Also, can WMA rates be lower than repo rates?

RBI's lending to states including the WMA (Ways and Means Advances) loans depend solely on the RBI laws. A WMA is more like a current account overdraft and getting capital even at repo rates is not a bad deal.

From a risk standpoint, state government lending appears low-risk on paper but in reality any large PSU or private sector bank can borrow at rates lesser than state governments. This is only because state governments carry larger debts and the credit risk is higher than large PSU or private sector firms. With a decline in GDP and increase in deficits on cards, the RBI may have to evaluate debt repayment ability of states and appropriately re-look at lending to state governments. I think our current borrowing itself may grow by 7-8 percent.

Having said that, the regulator alone cannot decide subsidizing interest rates, the Central government will have to approve such directions.

Also Read: RBI hikes WMA limits and other Covid-proofing measures

State governments have complained of a financial squeeze. Are there any creative remedies to tackle state-finances?

Revenues have dipped in the last few months for state governments as well as the Centre. Some states have revised salaries to staffers. Furthermore, delays in salary and pay-outs to contractors are serious problems. But, I don't expect either states or the centre to cut on key expenditure.

I don't think there will be creative ways given how hard it has been for states to promise large returns. Also, creative funding occurs when there is optimism about the future. In a crisis, creative financing is a wrong choice.

As a solution, states can look forth to arranging smaller sums via securitizing receipts such as revenue, property taxes etc. Doing so will help avoid large deficits.

A program where the state and central governments can work together is healthcare. This could be a joint initiative where states and the Union can invest for 12-18 months in ramping capacities in urban areas. The partnership could improve our medical infrastructure, add nursing facilities, support staff etc. The added-benefits will be seen in education, employment, and construction. With a vaccine still months away the healthcare sector demand can soar by a huge margin.

Also Read:

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What is the one major risk for Indian banks?

They may have to re-align their credit portfolios. The blip in demand post Coronavirus will hit interest coverage, working capital utilization and also in poor cashflow. Personal Loans which are one of the most profitable portfolio for several banks is a major risk. Job losses can have a disastrous impact on personal loan portfolios.

According to RBI's March 2020 data, personal loans - Housing, Consumer Durables, Credit Cards Outstanding, Education, Vehicle loans and others in the last one year are estimated at 15.7% of total annual bank credit or Rs 25.68 lakh crores.

Will India join the protectionism talk, given that global leaders are talking about trade barriers and restrictions?

I think the US-China dialogue is more noise - less action. China and US are inter-dependents when it comes to trade and the rhetoric is just a diplomatic game. India is unlikely to be a part of this game. I am saying this only because a developing economy like India needs more capital for its growth and jobs markets. Also, Our domestic savings has been constantly falling. Our large trade deficits, higher import bills and gold demand will dissuade us from becoming protectionist.

How should we define the ideal leader of 2020?

If I were a leader, I would be more benevolent... Care for my people...

Leaders will not mind sacrificing profits for employment. And, if the situation demands a personal sacrifice - the leader will take a hit himself. Also, organizations and boards should not mind spending that extra-money on CSR activities and community engagements.

Cost cutting is very easy, but benevolence and engagement with community are traits that will define leaders of 2020.

Also Read: Mukesh Ambani foregoes salary until Covid-19 recedes