COVID-19 has broken out estimations of growth for various businesses including the banking sector. It had a significant macroeconomic impact with the exponential spread of COVID-19. It also increased a huge fall in major indices relating to repercussions for firms and households.
Many countries are still facing a challenge with a significant blowout on GDP numbers. Coronavirus impact indicated a potential increase in negative figures across most sectors, with both regulators and financial institutions remaining uncertain till the current point.
Starting from liquidity and cash maintenance to re-adjusting operations, banks need to take measures on a large scale to avoid the current crisis. In this article, let’s take a look at the impact created on the banking sector due to COVID-19 and the possible solutions to overcome issues with impact created on the banking sector due to COVID-19 .
Crisis for corporate banks due to COVID-19
Most firms that dropped from businesses aren’t in a position to repay loans. This being one of the major setbacks for banks, the personal and other loans to be paid by furloughed employees is another foreseeing factor for banks that blows out their revenue.
Despite the losses in profits and bank capital, the sustainability in existing banks and financial institutions marks a question mark. In turn, it replicates in job losses of bank staff and also extends to the broad economic crisis.
Banks are negatively affected due to lost value in bonds and other traded financial instruments. This results in further losses for banks, in the way it happened during 2008/09 and created a global financial crisis. Open derivative positions may be at stake with the losses and everything moves in unexpected directions due to the crisis.
Lower demand for their different services might bring a position for banks to face lower non-interest revenues. Also, lower capital buffers and losses in banks can have negative spillover effects with impact created on the banking sector due to COVID-19 . This might make the bank’s solvency position even worse and degrade the broader economy.
Key takeaways to improve banking sector
There were immediate measures taken by regulators to ease restrictions on capital and liquidity. Also, banks are providing important support measures in this time of crisis. Yet, the length and severity of this outbreak remain uncertain.
Below are the possible solutions for banks to reduce the COVID-19 impact:
- Reducing potential draw-down on credit facilities by clients
- Additional capital requirements to maintain capital adequacy ratio
- Revision to loan loss provision estimates
- Compressed net interest income margin.
How different sectors relate to the banking crisis?
The banking sector is affected indirectly, as the real estate sector is a provider of savings, payment, credit, and risk management services. Likely, this extends the negative effect of the Covid-19 crisis on banking from March 2020 in a roundabout position from real and other sectors too.
The lock down to prevent the spread of the Covid-19 directly had a severe impact on firms dealing with customers. The stakeholders include hospitality, transport, and various other departments that lost huge revenues. People missing their employment income are the worst part.
The temporary halt in the rotational movement of savings, investments from different stakeholders harmed banking and financial institutions. Banking further extends its criticality in the economic recovery as the pandemic situation remains uncertain even at the end of July 2021.
Key possibilities of recovery
The indefinite answers on the COVID-19 blockade are not so reliable, as the economic crisis globally rises. The possible solutions by banks and financial institutions are to accelerate trends towards new service providers while improving digitization methods for customers.
A complete response strategy to the crisis in corporate banking
Corporate banks need to implement bold decisions in response to the crisis to trade-off doing what is right for the clients. Also, they need to keep in mind the minimizing measures in reducing reputation risk that protects the bank’s balance sheet and shareholder returns.
Below are four key methodologies to withstand in response/recovery for the banks with impact created on the banking sector due to COVID-19:
- Help clients to maintain operations
- Proactively engage with customers
- Build a Dynamic Credit Decision framework
- Digitize offerings and automate the process.
Banks need to ensure key operations continuity to effectively manage the crisis while proactively meeting clients’ immediate needs. The critical phase of the next 6 months to one-and-half years from now will be so significant in monitoring business progress and build more valued relationships with clients.