This is part 10 of a series of articles on the impact of COVID-19 in the banking and insurance sector with inputs from leading BFSI experts of the Manipal Global Academy of BFSI. Read part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8 and part 9 here. This article was written by Raghunandan V J, a faculty member at Manipal Global Academy of BFSI.
Retail Banking had emerged out as a segment, which enamoured the Banking Industry because of its inherent characteristics and strengths. The spread was good, the customer base was good, products were neatly structured, demand was growing and the marketing strategies including the tie-ups were all falling in place. Banks were very upbeat and positive on this segment and the business goals were revolving around increasing business on the Retail Front. Retail Business was growing and all was well.
COVID-19 arrived and overnight the retail segment particularly retail lending turned into a worrisome segment where moratoriums stipulated by RBI would affect the income flow and force the banks to reinvent themselves to stay relevant in this segment. The risk from virus does not only affect the Data or a system (as popularly believed) but a whole segment and industry. This single virus has made the Banking Industry have a quick relook at their retail portfolio and far ahead reinvent themselves to stay relevant and profitable in the retail space.
COVID-19 is bound to leave an indelible mark across sectors of the economy and the Banking Industry that is the engine for the economy is the most affected. This is the most serious challenge that the industry has had to face this century.
The challenge is twofold: repositioning for the present, and reinventing for the future. They need to keep their distribution channels working amidst the social distancing is the immediate challenge. Toggling between managing revenues and customer expectations will be a hard task.
An excellent opportunity for those who are yet to catch up on transforming delivery or products and services DIGITALLY. Their present strategy and brand connect will redefine the future of the banks in the retail banking space as the market forces and customer behaviour will be moving goalposts.
The situation demands that the banks take concrete steps to support their operations and customers while they do a balancing act in repositioning themselves. Else, face tough competition from smaller players who are robust on DIGITAL delivery and who will eat into the existing market share. These players can be Fintech Companies or even Small Payment Banks like Fino (a recent article says – Fino Payments Bank has better Digital delivery than Kotak/Axis/IDFC and all PSUs).
The response of the banks to the situation – as of now and moving forward, will determine whether the retail segment will continue to add profits or be a drag on them.
Let us first analyze the impact of COVID-19 on the Banks from the perspective of immediate concerns
Immediate overall concerns for the Banks
1. Business Continuity
- This includes branch operations, migrations to ADCs and also cost control in view of the fact that income from the retail segment is going to take a real hit. Right opportunity to modify, strengthen, sharpen quality of services & Products – both Physical / Digital modes
- Restrict customer footprints in the branch to avoid cross-contamination. Some branches in view of the limited space availability may not support social distancing. Some branches, which are having comparatively, lower footprints or which are very near to each other, may have to be closed and walk-in customers moved to other branches. This will help in the smooth implementation of staff working on a rotational basis.
- Branch Visits through appointments only basis the purpose of visit and whether next such visits be shifted to a digital channel or a call centre.
- The most popular and the most frequently used alternate channel – ATMs should be a priority now. Maintenance and cash loading of ATMs will take the burden out of the branch staff. Cashless transactions promoted more aggressively and visibly on various digital sites of the Banks. The fact that RBI has already taken steps to abolish the charges for other Banks ATMs usage should certainly help, in this regard. Simple products like FD/ OD on FD/ Personal Loans / Credit cards – to be moved to all ADCs – Net Banking, Mobile Banking, ATM and even Phone Banking – Customer should be able to book FD or OD or take a loan through phone banking – this will be a new experience to enhance customer relationship. ICICI Bank has launched voice banking on Amazon Alexa and Google Assistant.
- Automation of routine work with the help of some automation tools may help. Data Mining Activity can be sharpened, right potential customers to be identified; moving good customers to Preferred Banking in these times will be a confidence-building measure.
- There can also be a rebalancing of critical staff by moving them from non-critical areas to functional customer-facing locations.
- It may be worth reviewing the outsourced work as the pandemic could have affected the other agencies as well cut down on the operational risk by looking at their respective BCPs and ensuring that they are robust and dynamic. This will help in onboarding alternate service providers in case of need. The BCPs of the service providers is also a critical input in your business continuity plans.
- Employees are important stakeholders. Their wellness helps in the wellness of the Banks.
- It may be that majority of the employees may not be very adept in virtual working. A quick training program to strengthen their skills on this is the need of the hour.
- Can business through digital channels be incentivized is a question that has to be answered in the context of continuity of business. The need of the hour for the survival of many banks else competition is now moved to Digital Delivery rather than product features – THIS IS A GAME CHANGER.
2. Increased customer connect for proactive management
The current response to customer needs can have an ever-lasting positive impact on the banks’ brand. It is easy to claim that the Banks’ policy revolves around the customers. It is in times like this, the Banks have to “walk the talk”. There is no dearth of customer data available in the Banks. From the available data, information can be mined on which segment of customers requires management and handholding.
The future relationship would definitely depend on this.
- Temporary reliefs to given – the Banks anyways were forced to do this because of the RBI Moratorium.
- A clear message that relationship is more valued and cherished rather than revenues.
- Activate the customer feedback channels on what the customers feel on the reach out by the Bank.
- Create awareness of what is being done in times of crisis.
- Offer customized solutions to enable tiding over the temporary financial challenges
- Put in place a mechanism for meeting the needs of the special segment may be senior citizens, trade segment.
Concerns on the Retail Business Front
- Stoppage of income flow from the retail loans albeit temporarily
- Stress on NII & NIM
- Reduced Profitability
- Higher provisions for a likely spike in NPAs
- Adverse effect on both top-line and bottom-line
- Managing the cost of lending as it will go upwards
- The vulnerability of the retail segment for further lending
The going would be tougher for some Banks, which have strong consumer finance on their retail segment portfolio. These Banks have to rejig their retail loan product mix. The premises on which the focus on consumer financing driven by a very good network of tie-ups are built are – expanding income levels and aspirational needs.
COVID 19 has shaken these very premises. Job Cuts, Salary Cuts will make consumer finance more vulnerable. Unsecured Retail Loan Credit and Consumer Finance inquiries have shown a dip of 10 to 29% (on a week-to-week basis) from the end of March 2020 indicating a sharp fall in demand.
Customer demand and increasing income levels fuel retail Credit. The expectations and realities post COVID 19 are different and in fact in some ways diametrically opposite to each other.
|Demand for discretionary spends would pick up post the lockdown||Significant Income growth (the main driver of consumer finance) may not be there for the next couple of years.|
|Consumer Finance may look up and things would be back to normal again.||The layer of excessive spending seen before the lockdown may not come back.|
|Demand disruption would only be temporary||We will not have people upgrading their vehicles frequently or taking a loan for a lavish wedding or an extravagant holiday, in the near future.|
|The practice of consumers relying on loans to move up the lifestyle will take a backseat in the medium run.|
Going ahead, post-COVID 19, Banks will have to grapple with challenges on the following fronts, particularly with reference to retail business:
- Effective Management of Credit Portfolio
- Contraction in Revenue
- Changing Customer Preferences
- Product Innovation and Customization
The greatest challenge would be the effective management of the credit portfolio in light of the collapsing cash flows of consumers and businesses. If this is not addressed well, there will be a spike in NPAs and resultant provisions will further erode the profitability. A few vital issues that Banks have to focus – on supporting Government decisions, having their own revised credit tolerance limits.
Banks should start proactively reaching out to the customers with customized and tailored solutions by doing a cash flow remodelling of not only different sectors but also of individual customers (in respect of retail lending). Banks will have to go back in time and consider ways to convert a past cash flow based lending to the present asset-backed lending.
The Banks have to develop a good quality team of Relationship Managers who can be prudently creative to credit risks. They would need training on bank specific products and government support available and skilled to combine both to offer credit solutions.
Regardless of how effective the credit offering be (a combination of bank-specific products + Government support), and the revised tolerance limit, there will always be a spike in NPAs which will have an adverse impact on the credit portfolio. Revised tolerance limits may delay the slippage but eventually, it will happen as sooner or later, businesses or customers will be unable to make the next payment.
There should be a clear roadmap for capability building in the operational staff to handle delinquent loans. The staff should be reoriented not only to handle typical recovery procedures but also to address customer issues emphatically and constructively. This way, the Banks have to be prepared for losses as well. There should be a credit expansion as well to fuel the growth. A data-driven approach to new lines of credit will assume more criticality.
Post-COVID 19, as incomes dry up and CASA balances dwindle, Banks will have to come out with smart lending options to support new credits. The Banks have to answer questions on cost and convenience.
The next challenge would be in terms of revenue contraction. Declining NIMs will exert pressure on the Banks’ bottom-line. Unless the Banks find newer ways of shoring up the revenue lines. Banks have to look into their non-core operational areas to do this. There is bound to be a drop in the revenue stream owing to an increase in NPAs, fresh credits not taking off as desired and collapse in demand across sectors.
Banks will have to align themselves with more players in the e-commerce space to open up a new source of revenue and build on the same. The fee income of the Banks would also likely see a downward trend as the AUM will likely drop, courtesy, market volatility and the changed preference of customers towards short term planning will cut down on opportunities for new product lines development and sales. Trade Finance and trans border transactions are expected to decline primarily because of short supply from the affected countries coupled with a fall in the internal demand.
A short-term impact would be changing customer preferences. While branches will continue to be the preferred channel of service, the customer preference would probably change in these times for safety and precautionary reasons. They may have to be facilitated to migrate to alternate channels through proper guidance and handholding.
Here too, data mining will come to the rescue of the Banks. They can segment the customers based on their service channel preferences and reach out to help the segments who are unsettled on the usage of digital platforms and support those segments who have the willingness and capability for remote transactions. May be, Banks have to incentivize the digital transactions for a short period. There would be a widespread appreciation of the Bank initiatives in this area.
Educate the customers to navigate through the less used features of a digital platform that they may now need to use. Educate and Train both the staff in facilitating usage and the customers on the usage. ATMs should be disinfected and made risk-free for usage. Probably, this is the time to turn off the IVRs and have live people answering the calls for the customers to be reassured and creating a personal touch. Banks would have to accelerate the digital sales and services without a compromise on KYC and Security Risks.
For retail customers, Banks have to consider collaborating with other relevant players in the ecosystem by adopting a collaborative approach rather than competing and offer a holistic complement of products. Moving the retail loan products end-to-end to the digital platform and the ability to offer long term fixed rates to tide over the problem of short term cash flows, would perhaps be the major differentiators.
Banks would have to go in for Product Innovation and customization in a big way to offer tailor-made financial solutions to the customers. This is more so in the retail segment space. More and more services have to be pushed digital. On the retail liability front, Banks should begin to look at offering more services like creating a loan against their own deposits, closing a loan on fixed deposit online etc. to ensure further augment the convenience factor. It is here that a detailed study of the competition helps. What is that the competition is offering that is not available with us, should be the question uppermost in the mind. Banks will definitely be looking at designing interventions and initiatives that have a long-term value.
Innovation can also be in the delivery of a product or service or in the features itself. To be able to do all these, Banks should further strengthen their customer connect and focused feedback mechanism.
Can Banks be opportunistic?
- Due to Stay at Home conditions – Customers’ expenses on patterns like online shopping, traveling, fine dining, is hugely curtailed. This is helping in the increase in CASA balances.
- The right time to approach customers for liability products like RD / FD/ MF / SIP/insurance schemes covering such diseases – this will spread a message that the bank is pro-active in trying to push a Saving habit for a rainy day – concern on healthcare costs
- Huge opportunity to study profiles of good customers of bank branches (referred to as “preferred customers” in private sector banks) and identify cross-sell opportunities that otherwise are systematically cultivated by competition.
- Create a campaign to select current account customers who may be segmented as manufacturing, education, medical fields – offer MSME/ OD/ CC products (keeping TAT as the challenge) to help overcome this phase of a delayed payment cycle. Product re-engineering.
- The proactive approach of an SMS, Email, NB campaign to all asset customers guiding them on how to manage cash flows – in terms of moratorium, its benefits or effects with timelines – as an FAQ – this is not being done by any bank apart from some Pvt sector banks.
- Systematic guidance to those stressed loan customers who are either on the verge of slippage or NPA on how to manage the situation effectively or practically – within the limits of Credit policy and its modifications advised by RBI. COVID 19 Credit Policy.
- Important step – ensure ReKYC updation of high risk and medium risk customers – Cannot get a better opportunity – DIGITALLY (this Is actually a time-consuming exercise which eats away huge productive time during normal times and is also a crucial regulatory requirement)
- Banks can use these times to also set right serious audit observations which would have seriously affected the rating of the branch – it may affect growth opportunities due to these adversities.
In short, Banks will be remembered for long and their brands cherished basis what they do or what they fail to do in the next 2-3 months and this is going to play a pivotal role in customer relationships as Banks would try to position and reposition themselves depending upon their reading of the situation. While all efforts will be made to tide over the short-term crisis, an eye would also be kept on long term prospects as the Banks gear up themselves post COVID-19.
About the Author
Raghunandan V J is a banker with 30 years of experience in a leading public sector bank. He had served as head of south India of the retail wing of the bank. He holds MCom and an MBA in HR. He is also a Certified Associate of Indian Institute of Bankers.
Currently, Raghunandan is working as Assistant Professor with the role of Associate Dean at Manipal Global Academy of BFSI. He has over 10 years of experience in training banking professionals.