Indian banks risk Rs 12-trn hit till 2024 from Covid-19: McKinsey

Global strategy consultancy firm McKinsey has estimated that banks in India could face a potential hit of Rs 12 trillion till 2024 from the fallout of the Covid-19 pandemic — with revenue foregone estimated at Rs 5.5 trillion and loan loss provisions about Rs 6.7 trillion.

The crisis of 2008 came from within the financial services industry, but the current one has affected the real economy and banks are economically afflicted alongside other sectors.

This is delivering the biggest stress test to banks. It is a test that the industry has withstood so far, whilst demonstrating resilience and purpose, McKinsey said in its annual review of global banking.

Akash Lal, senior partner and head of financial services at McKinsey, said the firm anticipates the test for banks to evolve in two stages in the months and years ahead. First will come severe credit losses, likely through late 2021. Almost all banks and banking systems are expected to survive. Then, amid muted global recovery, banks will face a profound challenge to operations that may persist beyond 2024, he added.

The total impact (on banking in India) is expected to be Rs 12 trillion till FY24.  About two-thirds of this will be due to increased risk costs on corporate, SME (small and medium-sized enterprises) and consumer lending. Plus, around 20 per cent may be due to volume compression — lower demand of consumer and wholesale lending as incomes/demand take time to recover, according to McKinsey.

Another 10 per cent impact is expected to be due to margin compression as interest rates remain low and there is increased competition for “safer” assets.

India’s banks will need a 25-30 per cent increase in productivity to return to pre-Covid profitability/return on equity. Most efforts have been focused on cost reduction.

India’s banks have seen a massive scale up in digital deliveries, but most seem to have lagged on investments in digital infrastructure. Scaling up tech-infra will be needed, McKinsey said in the review.