Analysis: How Banks all over the world are facing challenges!

The world has changed dramatically since the pandemic or Covid-19 outbreak. The entire process of living has changed, as has the economy and all financial institutions. Financial institutions all over the world are facing real challenges to keep their position stable and prevent themselves from the loss.

According to BICRA Scores and Economic and Industry Risk Trends, on a scale of 1 to 10, varying from the lowest-risk banking systems (group 1) to the highest-risk banking systems (group 10) by 2020, the ranking has changed dramatically. According to the report, Mexico and Iceland dropped from 4 to 5, South Africa and India dropped to 6 from 5, Oman dropped to 7 from 6, Costa Rica dropped to 8 from 7, Bolivia dropped to 9 from 8, Sri Lanka dropped to 10 from 9, and Tunisia dropped to 10 from 9.

Changes in trends have been observed, with countries such as Australia, Austria, Belgium, Chile, Croatia, Finland, France, Iceland, Indonesia, Italy, Jamaica, Malta, Netherlands, New Zealand, Peru, Philippines, Poland, Spain, Sri Lanka, and Thailand moving from stable to negative economic risk. When it comes to industrial risk, France, Ireland, Sri Lanka, Turkey, and the UAE fall into the negative category. During the year 2020, the COVID-19 pandemic had a substantial impact on Spanish economic activity. The GDP for that year was down 11% from the previous year. This decrease has been much greater than in other European economies.

The Banking Industry’s Challenges:

1. The worldwide economic downturn has lowered lending rates and transaction volume. Banks must consider the economic impact as well as a rising proportion of troubled assets among other things. In certain countries, banks’ Tier 2 capital levels might drop by as much as 2%.Because only the most eligible ( based on credit score) applicants are chosen for a loan, the banks’ overall low capital position may constitute a threat to economic growth.
2. When it comes to fighting the pandemic through regulation, support in the areas of NPL (Nominal Provisions for Loan Losses) detection, administration, settlement, and capitalization will be required.
3. Interest rates are expected to remain low for some time, which may appear helpful in the short term but poses long-term dangers for banks as nonperforming loans (NPLs) tend to climb and endanger banks’ sustainability.
4. There has also been a shift toward digitization as a result of the pandemic. Prior to the pandemic, digitization was progressing slowly, and most banks were considering making the switch, but the outbreak seemed to provide a substantial impetus. As modern digital players engage in banking-related operations and technically challenge existing banking institutions, the shift to digitalization and FinTech has enhanced competitiveness in the financial sector.

Considering Covid-19 has altered the entire framework of how a typical financial institution operates, the banking sector must reconsider its business models, rules, and regulations. To stay on track, they must incorporate new strategies and methods. Around 140 countries have implemented around 1,400 remedies to safeguard the banking industry. According to a World Bank Group’s report by October 2020, the worldwide financial support provided by governments was estimated to reach over $12 trillion. Government programs and bank cooperation have proven beneficial in smoothing the bankruptcy curve.

Solutions:

1. Banks will once again need to understand their clients’ needs and analyze shifts in their preferences, modern data analytics will enable them modify their services while also adapting to the changing business landscape.

• Banks must rethink their business models and migrate from traditional to digital customer acquisition and retention. This entails bridging the digital approach gap between branches and banks, as well as mobilizing client digital participation.

• Banks are being encouraged to research business innovation activities in order to enable company sustainability and cost reduction. Developing innovative client offerings for the new normal, including new tools/partnerships to enable them, such as open banking and financial technology. It is also essential to prepare for post-crisis operational paradigms.

• People management is also essential. One of the most difficult problems confronting policymakers is the transformation of the Bank. Measures may be taken rapidly, sometimes even in the heat of a crisis, based on little knowledge.

• The help of the government is essential. Governments should aggressively support regulators in the case of a decision to close insolvent banks. Resolving challenges in the financial industry may necessitate the allocation of fiscal resources.

• Transparent measures for dealing with NPLs might be implemented early on, allowing a core of sound banks to continue to assist economic progress. This includes identifying problem assets, assisting banks in implementing bank-led and system-wide NPL Resolution initiatives, and creating an enabling environment that incorporates insolvency and creditors’ rights.