Covid-19 impact, will some banks fail?

Abstract

As the economy reels under the impact of the coronavirus pandemic, banks are bracing themselves for the multiple challenges they face. Capital adequacy and asset quality Banks need capital as a buffer for bad loans. The Basel norms require banks to set aside 10.5% of their risk weighted assets as capital including capital conservation buffer of 2.5%, while the Reserve Bank of India mandates a slightly higher figure of 11.5% (end state). Thanks to massive capital infusion into public sector banks by the government through recapitalisation bonds and direct equity after the NPA crisis, most banks were scoring well on this front, pre Covid-19 outbreak. With the economy just emerging from a prolonged lockdown on account of the pandemic, banks face mounting losses on their exposure to the MSME segment, unsecured consumer loans, weak NBFC’s and Micro Finance Institutions, direct lending to the micro finance segment, real estate financing etc. In addition, while most of the hidden skeletons in the large corporate segment surfaced during the last NPA crisis, the large/mid-sized corporate segment could again pose some shocks to banks.