The global pandemic is putting economies and financial systems around the world under unprecedented stress.In India, this represents an even sterner test for a banking system that is still reeling from the impact of bank failures prior to the outbreak of COVID-19. Amid a national lockdown and fears of a liquidity crisis, companies in India are joining consumers in shifting business to the largest and presumably safest banks. In this report, we will analyze how the still-unfolding crisis and the many other challenges facing India’s banking sector are affecting the competitive positioning of individual public- and private-sector banks.

INDIA’S BANKING WOES PILE UP

These key factors converged to create a perfect storm in India’s banking system:

• Stress of Public Sector (PSU) Banks’ Balance Sheet
  With direct intervention from the Indian government, non-performing asset (NPA) ratios had started to decline by 2019, but this is still a work-in-progress for the PSU banking sector. The series of public bank mergers orchestrated by RBI represent a critical step that will make the banking system stronger and more stable. However, navigating sweeping organizational integrations is going to be tough with the epic challenge of the COVID-19 crisis.
  
• NBFC Liquidity Issues
  The nonbank financial companies (NBFC) crisis, which started in 2018 with the collapse of IL&FS, continues to plague the Indian banking sector. These 10,000+ lightly regulated NBFCs are not only a critical source of credit for small and medium businesses, they have also become intricately linked with the overall banking sector. Despite the government’s pledged support, the credit crunch brought on by the COVID-19 pandemic is set to drive systemic risks and create additional hurdles ahead.
  
• Macro Slowdown
  Underlying many of the problems has been India’s slowing economic growth since 2017. Coupled with business conditions worsening due to the COVID-19 shutdown, CRISIL* estimates that the economy will shrink by 5% in 2020. The government’s economic package is unlikely to provide sufficient support as the lockdown drags on, inevitably putting greater stress on the banking sector.