How are financial institutions reacting to the COVID-19 crisis?

How are financial institutions reacting to the COVID-19 crisis?

Interesting question. Certainly, COVID – 19 pandemics has been an unexpected crisis that obliged the actors of the financial system (in particular, private banking) to take immediate measures in order to cope with the situation, aiming for minimization on the effect of sudden quarantines in borrowers, especially SMEs and households. Accordingly, measures were taken by the Colombian banking system, like:

a) Grace periods from 2 to 4 months;

b) Loan refinancing, even to 6 months for mortgage credits (estimated on COP 402 million, 38% of GDP);

c) Special lines of credit;

d) Discounts in the exchange rate, in general for all financial products, and particularly, for online payments of certain goods and services (hospitals, pharmacies, supermarkets, among others);

e) Taking measures for online payment of pension allowances;

f) Extension periods for credit cards payments, even for 48 months (extender to 11,8 million of clients, for COP 225 million, 21,2 GDP).

All of these measures, without affecting credit reporting or taking into consideration the type or number of obligations of each borrower (El Tiempo, 2020; La República, 2020).

Apparently, these measures have been successful in avoiding the deterioration spiral of the financial sector’s portfolio: as of July 2020, 96,1% of the more than COP 526 billion owed by borrowers to the banking system in Colombia is up to date. As a paradox, portfolio indicators are better than before March of 2020 (El Tiempo, 2020; La República, 2020).

Nevertheless, the financial system institutions must remain vigilant taking into account the uncertainty from COVID-19 in the medium and long-term, the foreseeable expectation about some aggressive fiscal and monetary measures worldwide, and consideration about the immediate needs of clients, with their implications on operational, financial, risk, and regulatory compliance for entities (Baret, Celner, O'Reilly & Shilling, 2020).

Undoubtedly, there are several lessons from COVID-19 that will shape the banking industry for future years: the advance of online banking (going into 100% virtual banks), with more participation of senior citizens, and more interest in real-time information; focus on more apps and social media (not forgetting the old but reliable email), the permanent threat of electronic frauds); and the fear of contagion when handling currency, cellphones, credit cards, and biometric devices (Portafolio, 2020). 

Let's check it out in more detail:

For example, the temporary closure of some branches, and employees who cannot o don't want to come to work. Regardless of digital banking, it is true that ATMs may need to remain open and have enough cash to dispense. In order to manage absence and social distancing, banks must consider reducing branch hours, utilizing drive-through operations, and to promote actively the render of services only through digital channels (a strategy that imposes challenges to many clients, in order to guide them to 100% virtual banking). The necessity of working at home for many employees (traders and client service personnel, mainly), imposes a big investment in technological support applications. 

In the medium and long run, if general economic conditions deteriorate, this will lead to lower GDP growth, thus reducing the demand for banking products and services, and the financial institutions' net interest income as a direct consequence of that. The pressure will be increased with central banks cutting interest rates, in order to manage inflation. Apart from that, eventually, credit quality and ratings will be affected for clients experiencing stressed financial conditions. Pledged collateral will experience a decline in value, and customers will tend to behave making minimal or delayed payments. Obviously, market systemic risk will be increased. 

And so on. Certainly, this is not an optimistic view, but I hope that with discipline, sound judgment, and especially, resilience, all of us will be recovering gradually from this unexpected crisis. I am confident about it. 

References:

Baret, S., Celner, A., O'Reilly, M., & Shilling, M. (2020, April 1) COVID-19 potential implications for the banking and capital markets sector. Maintaining business and operational resilience. In Deloitte. Retrieved from: https://www2.deloitte.com/cn/en/pages/financial-services/articles/banking-and-capital-markets-impact-covid-19.html  

(2020, March 20) Los alivios de la banca para sus clientes por crisis del coronavirus. In El Tiempo. Retrieved from: https://www.eltiempo.com/economia/finanzas-personales/medidas-de-los-bancos-en-colombia-durante-el-coronavirus-474374

 

(2020, May 7) Los cambios que la covid-19 traerá para los bancos. In Portafolio. Retrieved from: https://www.portafolio.co/economia/los-cambios-que-la-covid-19-traera-para-los-bancos-540625

(2020, September 25) Medidas de apoyo a deudores han contenido el deterioro de la cartera. In El Tiempo. Retrieved from: https://www.eltiempo.com/economia/sector-financiero/pandemia-asi-es-el-golpe-del-covid-19-en-la-banca-colombiana-539671

 

(2020, October 27) “Las medidas ejecutadas por entidades del sector equivalen a 38% del PIB hasta la fecha”. In La República. Retrieved from: https://www.larepublica.co/finanzas/las-medidas-implementadas-por-las-entidades-del-sector-equivalen-a-38-del-pib-a-la-fecha-3079982