dmpq-“For a banking sector-dependent economy like India, the good health of the banks is very important to ensure accessible financial services and flow of credit to support the growing economy.” Discuss India’s banking sector amid covid-19 crisis.

. Indian banks were written off in the early days of the pandemic when there were expectations of an exponential jump in non-performing assets. This worry continued well into the third quarter of the year. It was, however, only after the banks, in their forward guidance, consistently talked about the lower number of restructuring requests, and the higher provision coverage ratios that the markets began to get convinced. What finally turned the corner were the budget announcements related to the financial sector.

There are several reasons for this. First, banks in India and globally were much better capitalised prior to the pandemic. Second, Indian banks had built up a sizeable buffer to provide for bad assets negating any surprise on balance sheets during and even after the pandemic. Third, independent research shows that as the size of the middle class grows to about two-thirds of Asian households, on the back of a steady rise in disposable income, personal financial assets in Asia will reach about $69 trillion by 2025 — approximately three-quarters of the global total. This trend will be the main driver of demand for financial services in Asia, specifically in India. Banks in Asia, including in India, have begun to adjust for this steady growth in the size of pie by experimenting with new business models, rationalising costs and providing faster and superior customer digital experience, as was clear during pandemic.

Fourth, Indian banks and the RBI brought about financial discipline much before the pandemic to make borrowers realise that timely payments of interest and instalments were necessary and that any breach would affect their ratings and the pricing of loans. For example, units with high leverage were advised to reduce their debt levels in a time-bound manner. All these factors thus corroborate the view that the current exuberance in the Indian financial sector is no flash in the pan. This was also helped by exceptionally prudent monetary management by the RBI and the recent budget announcements. Let us now come to that.

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