Understanding the sector impact of COVID-19 on Banking and Capital Markets: Where do we stand at present and what’s the way ahead?
It all started when World Health Organization (WHO) declared, for the first time in March 2020, the outbreak of a flu-like disease, later termed as Severe Acute Respiratory Syndrome – Corona Virus 2 (SARS-CoV-2) that affects the respiratory system causing severe damage to the lungs. Before, effects were only confined to Wuhan Province of China. Afterward, the movements of diplomats and the general public without prior safety precautions led to the exponential growth of COVID-19 worldwide. The legal authority initiated measures to restrict movement since people were the carrier of the disease. This restriction hits the economy really hard, including the banking sector and capital markets, of countries that reported cases of COVID-19.
Impact on Banking and Capital Markets
As far as the impact of COVID-19 is concerned, most of the businesses have been affected worldwide. To put it into an example, the very first impact on the capital market was observed as the global stock market crash on 20th February 2020. It was reported as the largest downsize since the Great Depression in 1929. The financial crisis was shaped by the crisis in the oil business, termed as Black Monday, which led to the drop of oil price to the largest decline ever reported, raged by a price war between Russia and OPEC countries. As a result, Dow Jones Industrial Average experienced a 1300 points drop in a single day known as Black Monday and 1800 points drop on the succeeding Thursday, the worst-case scenario in the global financial market since 1929. It concludes that oil prices, bond yield, and equity prices were largely hit by COVID-19.
In the Nepalese context, the impact of the crisis is surmounting but at a slower pace than the global economy, however, banking and capital market specialists argue that the wave of the global crisis is expected to hamper Nepalese banking and capital markets. By far, Nepal reports a decline in government revenue. The recent publication of the profit statements of banks showed a downsizing in profit than the last fiscal year. The impact was largely felt by the statement of Rastriya Banijya Bank and other private banks such as Nabil Bank and NIC Asia Bank. Bank and Markets in Nepal have no other choice but to react upon the circumstances created by COVID-19. Amidst the COVID outbreak, government budgeting, and fiscal year policies were introduced. The question arises whether the policies look after the relief towards the impact of the COVID crisis to stabilize the market. On the other hand, banks have to consider that their services are the basic need of customers and have to serve their clients. Clients should not be deprived of their immediate needs. Governor of Nepal Rastra Bank warned the Nepalese Banks that the wait and watch approach in COVID-19 is only aiding to the rise in the loss of commercial banks. The government should provide facilities to commercial banks to continue its operation related to accepting savings and easing the flow of loans.
Capital markets reported the stoppage in the transaction for the beginning few days of lockdown but the trade gained pace afterward. A large number of investors were diverted towards the insurance industry and few insurance companies introduced initial public offering (IPO) which were oversubscribed. It can be observed that online trading has played a vital role in the continuation of trading preventing the negative impacts of stock trading in the Nepalese capital market. On the other hand, the government has assured that it will not stop trading on the secondary market.
From the knowledge of the global scenario and Nepalese context, it can be concluded that both banking and capital markets may face operation risk, financial risk, and compliance simultaneously. At the same time, they have the opportunity to support the market and economic activity. If banks and capital markets respond well to challenges, it is obvious for them to not only help society but also to build trust and reputation in the long run.
Potential Long Term Impacts on Banks and Capital Markets
As a result of challenges faced by banks and capital markets during the COVID-19 crisis, there are few takeaways e.g. digital transformation of operation, agility, future operations, and cybersecurity. For now, banks can opt to aid government actions through financial support, prepare contingencies for loss, and extend credit. Further, banks are increasing subsidized loans and empowering people to meet their immediate needs. Banks have to face the consequences of the extended loan term for recovery which can result from the halt in the operation of the business of its debtors or due to regulations forwarded by the central bank to provide ease to the borrowers during the difficult circumstances. Nevertheless, credit forbearance is the only way out that is observed to recover the loan with flexible payment terms. It is also necessary to forecast how continued reduction in interest rates, reduced business activities, and scaled nonperforming loans will affect the profitability and efficiency of banks and capital markets. There lies a basic requirement for banks and capital markets to analyze how legal or regulatory changes are absorbed by the business. It is obvious that the banks and capital market will experience revenue compression as regulatory authority tries to ease the situation of demand and supply.
Necessary Actions by Key Executives and Boards
The primary planning should be focused on the continuation of the business and at the same time considering the approach to mitigate the risk forwarded by the crisis. It might include the approach towards how to serve the customers well without any hindrances. Similarly, sustained employee engagement and motivation towards the work is essential. Large businesses insuring the employees against the COVID and also providing relief packages for the family can be motivating for the employees to work effectively. Key executives should track the changes taken by the regulator and discuss and if necessary advice to assure that changes are helpful to run the businesses amidst the COVID-19 crisis. Whatever be the circumstances, it is highly important to prioritize brand trust and reputation among customers and employees.
Practical Steps Ahead
Few practical steps include the continuation of ongoing core businesses. A necessary forbearance program, which is highly sought after by the large number of banks and financial institutions worldwide, should be adopted to mitigate the risk of non-performing loans. Customers should be supported remotely by following the guidelines of legal authority and shaping guidelines for customer service. Employees need to be motivated to engage in work productively, be it by allowing them to work from home or allowing them to visit the office alternatively. Banks can modify their approach to find prospective customers or to keep in touch with existing customers through relationship management platform. Another necessary aspect is to comprehend the legal and regulatory commitments adequately for control of the disease. The most basic requirement to work remotely has been an online platform. Therefore, the digital transformation for sales and service along with the regulatory requirements that ensure security is a must.
Ramesh Belbase, Market Analyst, MSc Financial Management (Edinburgh Business School, UK)
