As per media reports, dated August 2020, the Reserve Bank of India (RBI) has released its annual report for 2019-2020. The report says, moratoriums on loan instalments, deferment of interest payments and restructuring may have implications for the financial health of banks, unless they are closely monitored and judiciously used. These initiatives were taken to reduce the economic impact of Covid-19 and have averted a big spike in non-performing assets (NPAs), which had been reported likely to increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 to 14.7 per cent in worse condition, in case of all Scheduled Commercial Banks (SCBs).
Main Takeaways of the Report
Risk Aversion
Banks have become extremely careful while giving fresh loans to borrowers due to the fear that loans could turn bad in future. Since March 2020, the RBI has infused around Rs. 8-9 lakh crore into the banking system including multiple rounds of long-term repo operations, cutting the repo rate by a total 115 points since March 2020.
Bank Fraud
In 2019-20, frauds of Rs.1,00,000 and above value have more than doubled, increasing by 28 per cent in volume. There were 6,799 frauds involving Rs. 71,543 crores as of March 2019, the number of frauds jumped to 8,707 involving a whopping Rs 1,85,644 crore. Most of them are in loan portfolios of banks, both in terms of number and value. However, the average lag in the detection of frauds remains long.
Slow Economic Recovery
The economic contraction will take longer time to regain the pre-COVID momentum as the shock to consumption is severe. Discretionary elements in private consumption have significantly reduced, particularly in transport services, hospitality, recreation, and cultural activities. In some areas of work like hospitality, hotels and restaurants, airlines and tourism, employment losses are more severe than in other areas.
The sharp cut in the corporate tax rate, announced in 2019, did not help in restarting the investment cycle as was intended. Instead, it has been used by companies to reduce debt and build up cash balances.
Inflation
As per the report, headline inflation may remain elevated in the second quarter of 2020-21 but may moderate during the second half of 2020- 21. However, retail inflation was at 6.93 per cent in July 2020, above the upper tolerance limit of 6 per cent.
Therefore, targeted public investment, funded by asset monetisation and privatisation of major ports should be adopted to revive the economy. Goods and Services Tax (GST) council type of apex authorities can be set up in regard of land, labour, and power to drive structural reforms as well as the speedier implementation of infra projects.
Recapitalisation of public sector banks may no longer suffice to absorb post-pandemic losses though it assumes significance as the minimum capital requirements, calibrated on the basis of historical loss events.
Not a Single 2000-rupee Note was Printed in 2019-20: RBI