Nothing fine with banking sector

Friday morning was all set to bring some smiles on the face of a casual gardener who maintains a few lawns in our neighborhood. He had defied lockdown and reached to our place to do some spade work in the lawn which he has developed and is maintaining it since more than a decade.

“Jenab, RBI governor is going to address a press conference at 10 a.m.,” said the gardener. This was an interesting statement from the gardener, as I was not expecting him to have an eye on any development involving RBI governor. As I asked him how his press conference is related to him, he was quick to state that today he would be going to announce loan waiver for ‘us’.

Normally, a common man usually tracks politicians those in power with expectations for making such statements. The gardener had obtained a loan for purchasing a load carrier and was facing tremendous stress to pay installment regularly since August 2019 when the Article 370 was scrapped. Now the coronavirus induced lockdown has incapacitated him to pay the equated monthly installments (EMIs). For him three months moratorium on EMIs and rate cuts are meaningless as working class like him have lost substantial income in the present crisis and even many have been put out of job with complete loss of income. They are not in a position to repay their loans and rate cuts and moratorium on EMIs offer no solution to their woes.

Notably,  according to a report by Microsoft-owned LinkedIn, quarter of the Indian workforce has reported a decrease in their incomes, while 39 per cent reported a dip in personal savings due to the impact of COVID-19 pandemic.

While the gardener was still working in the lawn, RBI governor announced a rate cut again, this time slashing reverse repo rate by 0.25 basis points and other measures to make it easy for banks to lend more and more. But he didn’t dish out any sort of loan waiver scheme. However, the most significant, but downplayed by media and analysts, was the announcement of the RBI governor asking banks not to pay dividend for the financial year 2019-20.

Before, deliberating on banning the dividend payout, let’s have a look at the present as well as the future scenario for banks amid the coronavirus pandemic. Releasing more money in the system through policy rate cuts to enable banks to lend more and more is always a welcome step in a situation unlike the current one enveloped by jammed economic wheels due to pandemic driven inevitable lockdown.  But positioning banks with more and more liquidity to go for aggressive lending in this unprecedented coronavirus induced economic crisis bears question marks.

Why RBI preferred to roll out package in phases that too in less than a month? Normally, in the first instance, the regulator should have seriously evaluated the present and future impact of this Covid-19 induced health emergency and rolled out the packages in one-go. As the banks are already facing the heat in terms of their core business, getting the systems and procedures in line with the packages takes its own time and resources. It would have saved time and resources for the banks had the packages been announced in one-go. Frequently realigning operational systems bears a cost for the banks at a time where their earnings are continuously taking a hit.

One more important question is about the impact of improving liquidity by making drastic cuts in policy rates. Is this move really going to bring vibrations in credit scenario in the market? Are businesses ready to go for loans when they are facing one of the worst economic scenarios as lockdown has downed the shutters of every sector? Why should bank lend when there is no economic activity? Notably, even as funds are available with banks, we haven’t seen any enthusiasm on credit front. The banks seem to have become more cautious on safety front of their funds and won’t take chances to see another spell of bad loans loaded on their balance sheets. There’s also huge risk of existing loans turning bad even though three-months EMI holiday has been extended to all term loans. In view of the deepening crisis, there is scope of extending this repayment holiday for at least another quarter. However, as the repayment holiday gives a temporary relief to the borrowers, at the end they are loaded with more burden.

Precisely, in the ongoing pandemic situation, which is refusing to die down, coupled with complete lockdown, every sector of economy has been put to a grinding halt. Surprisingly, worries around economic issues are dominating the mind of a common man to policy makers more than focusing on the deadly disease Covid -19 which has left health professionals clueless and is consuming human lives unabated. Since the lockdown, which at the moment seems the only relevant answer to the pandemic as a controlling measure, has put pressure on the incomes, left skilled as well as unskilled people and self-employed out of job leading to their loss of income. The situation stands very depressing more for economic reasons than for being the most dangerous health emergency.

Now coming to another announcement of the RBI governor on Friday (April 17) asking banks not to pay out dividends for FY 2019-20 earnings until further notice, adding that the situation will be reviewed after the second quarter of FY21. What it means for the markets?

Let’s first understand the value of dividends. In today’s market scenario, ownership of stocks changes faster than it used to be. This has landed the payment of dividends in an interesting situation. A listed company on stock exchanges shares a percentage of its profits with its shareholders. A shareholder receives this portion of the company’s earnings, which is calculated on the basis of the number of shares he or she holds. In investor’s language, the earning shared by the company with its shareholders is called dividend.

During the first part of the twentieth century, dividends were the primary reason investors purchased stock. The companies literally used to attract investors by promising to pay dividends. Today, scenario stands changed. Now the companies sell their shares by saying, “the purpose of the company is to increase shareholders’ wealth.” And, dividend pay-out is important in the context of company’s reputation and soundness. There are many examples of how the decrease and increase of a dividend payment can affect the price of the company’s share.

Even as some market experts don’t see any negative impact of temporary banning dividend for  the FY 2019-20 and call it a move to conserve capital in future, it reflects a scenario where all is not going to be well with the banking industry. Toughest time is on cards for the banks as surge in bad loans is inevitable for years to come. Tough measures to keep the banking system afloat too cannot be ruled out and all stakeholders would be made partner of the losses which the banking industry is going to face in the times to come.

Meanwhile, with lot of question marks on the regulatory packages rolled out by the RBI, the government needs workout on sector-wise interest subvention scheme. Even it makes a sense to tailor a loan waiver scheme for small businesses in every sector with credit limit of Rs. One lakh or so to pull businesses out of the depressing economic situation.

(The views are of the author & not the institution he works for)