The Impact of COVID-19 on the Banking Sector: Risk Analysis

This assignment examines the impact of COVID-19 on the banking sector, focusing on the risks associated with suspending loan repayments. It analyzes how such strategies affect the banking sector's cash flow and liquidity, and how the suspension of loan repayments impacts SMEs and major banks. The assignment also explores how banks can ensure effective screening and monitoring of borrowers during the crisis, considering factors like repayment capability, collateral validity, and credit profiles. Furthermore, it discusses the unique characteristics of credit cards and their role as an alternative to cash, including their benefits and the conditions associated with their use. The analysis draws on various sources to provide a comprehensive overview of the challenges and adaptations within the banking sector during the pandemic.

2020
Banking Sector
The impact of COVID-19
Student Details

BANKING SECTOR 1
Table of Contents
Question a) Given that banks are suspending loan repayments what impact would these
strategies have on the risks facing the bank...............................................................................2
Question b) Banks screen and monitor borrowers to minimize adverse selection and moral
hazard. How can banks ensure that their screening and monitoring will be effective given the
coronavirus crisis?......................................................................................................................3
Question c) In selected countries credit cards are attracting special treatment. What
characteristics make credit cards unique?..................................................................................4
References..................................................................................................................................5

BANKING SECTOR 2
Question a) Given that banks are suspending loan repayments what impact would these
strategies have on the risks facing the bank.
The banks are suspending the repayment of the loan amount s, in order to support the
SMEs and the entrepreneurs, but such practices would impact the banking sector all over the
world, as due to the pandemic outbreak, the businesses are not being operated, and when they
will continue to operate within the industry, they will run dry of cash, and will not have
enough capacity to repay their existing loan amounts, as a result, the banking sector is
expected to be impacted for over a long period even after the situation gets stabilize and the
companies start operating within the industry. The banks will be required to focus on cutting
interest rates so that after the pandemic the banks can attract the customer within the industry,
also the bank capital ratios are required to be adjusted so that the banks have enough capital
and be in the position that they can operate within the economy (Jha, 2020).
As the banks are focusing on providing relief to the citizens in regarding the financial
transactions due to the pandemic but will have to face tough times in managing the situation
after the situation. As due to the suspension of the loan repayments, the banks will face a
reduction in the cash flow and will impact the liquidity of the sector. The suspension of the
loan repayment within the economy due to COVID-19 would result in impacting the business
operations of the SMEs and as a result, they would not be able to repay their loans initially
after the situation gets normal, and such will impact the banking sectors and the major banks
that are operating in the economies such as Europe, Italy or US (South, Avesani, & Brevigli,
2020).

BANKING SECTOR 3
Question b) Banks screen and monitor borrowers to minimize adverse selection and
moral hazard. How can banks ensure that their screening and monitoring will be
effective given the coronavirus crisis?
Banks deal with the establishing effective and trustworthy relations with its customers
within the industry, as in the case of providing loan it is required that the banks effectively
focus on screening and monitoring of the customers so that the details provided by them at
the point of loan can be verified and validated. The monitoring and screening done by banks
are based on the repayment capability of the individual towards the loan offered, the
calculation involves the collateral validity within the industry, and the client's previous
records and the source of income, therefore if such assessments made at the time of providing
loan were effective, then the banks screening and monitoring during the coronavirus will be
effective (Mckenna, 2014).
The banks effectively monitor the customers to ensure that the borrower's credit
profile is strong enough as compared to the time when the loan was provided and will be able
to repay the loan, the bank also restricts certain activities within the organisation in case of
complex loans so that the organisation’s credit limit does not get influenced. Therefore,
during the pandemic, the credit profile of the organisations may get impacted due to the
shutdown of the business for a temporary period, but the preventive measures taken by the
banks would help in ensuring the effectiveness of the bank monitoring and screening
activities (Moody's, 2018).

BANKING SECTOR 4
Question c) In selected countries credit cards are attracting special treatment. What
characteristics make credit cards unique?
Credit cards are an alternative source that the individuals can use in place of cash or
their balance at account. The credit cards have a fixed limit that defines the amount that an
individual can spend using the credit card, and it depends upon the creditworthiness of the
customer or the relation with the bank. The credit card offers the customer a choice to spend
either in domestic or international currency and reduces the stress of currency conversion
while travelling overseas. The banking institutions or the card-issuing authority provides the
individual with a minimum time period in which they have to repay the credit, and after that
certain fees are being applied (Kennan, 2018).
The credit cards are unique, as it does not require the borrower to represent any
collateral while getting the card, also they get various benefits and offers once they start using
the credit card facilities. The borrower can utilise any amount below the specified capital
limit, also it a source of credit with limited conditions, and depending upon the
creditworthiness of the customer and its trustworthiness the limits can be raised
(Zimmermann, 2020).

BANKING SECTOR 5
References
Jha, S. (2020, March 21). COVID-19: Lenders seek deferment in loan repayment,
reclassification of NPA. Business Standard:
https://www.business-standard.com/article/economy-policy/covid-19-lenders-seek-
deferment-in-loan-repayment-reclassification-of-npa-120032001261_1.html
Kennan, M. (2018). Characteristics of Credit Cards. The Nest:
https://budgeting.thenest.com/characteristics-credit-cards-30499.html
Mckenna, F. (2014, June 20). How can you monitor a borrower without financial
statements? CBR: https://review.chicagobooth.edu/magazine/summer-2014/how-can-
you-monitor-a-borrower-without-financial-statements
Moody's. (2018, November). Redefining loan monitoring and early warning signal detection
through an integrated solution. Moody's Analytics:
https://www.moodysanalytics.com/articles/2018/redefining-loan-monitoring
South, A. H., Avesani, B., & Brevigli, M. (2020, March 13). Credit FAQ: Will Mortgage
Payment Suspensions Related To COVID-19 Affect European RMBS? S&P Global:
https://www.spglobal.com/ratings/en/research/articles/200313-credit-faq-will-
mortgage-payment-suspensions-related-to-covid-19-affect-european-rmbs-11388778
Zimmermann, J. (2020, March 13). Master the 5 C’s of Credit. Nerdwallet:
https://www.nerdwallet.com/blog/5-cs-credit/