Covid-19 risks: What is the way forward for banks?

A teller at work in a bank. Banking is one of the sectors that were badly affected by the Covid-19 pandemic. PHOTO/FILE PHOTO

The banking sector is coming off a very profitable 2019 with most banks registering an increase in profitability.

And as such the positive sentiment at the end of 2019, was expected to be sustained into 2020, before the health and economic disruption brought by the Covid-19 pandemic impacted both the global and local economies.

This projection is now adversely impacted by downside risks stemming from new and accelerated uncertainties in the global and local economy caused by the Covid-19 pandemic.

This comes when most governments look to flatten their medical curves and contain the pace of new infections which invariably leads to a steeper drop in the economic performance of the economies. The list of economic indicators under stress makes it clear that the outbreak is negatively affecting global economic growth on a scale that has not been experienced since the global financial crisis of 2008-2009.

Global trade and GDP are forecast to decline sharply and the global pandemic is affecting a broad spectrum of international economic and trade activities, with most impacted areas notably being tourism and hospitality, global supply chains, wide ranging consumer products, transportation and the financial markets

Bank of Uganda (BoU) at their recent monetary policy meeting revised the economic growth projections and cut growth forecasts to over 2 per cent, an indicator that the impact of coronavirus disease on the economy was deeper.

According to the June monetary policy statement, the Central Bank, said the economy will expand by between 2.5 per cent and 3.5 per cent during the financial year 2019/2020, a drop from an earlier projection of 3.5 percent to 4 percent growth.

BoU Governor Emmanuel Tumusiime-Mutebile said even this growth will depend on how the economy is opened up from the lockdown imposed to stem the spread of coronavirus disease.

“It would depend on how the public will comply with the social distancing rules to ensure cases don’t surge again calling for another lockdown,” Mr Mutebile said.

BoU cut the Central Bank Rate (CBR) by 200 basis points to 7 per cent, in June, aiming to cushion the economy and encourage lending to households and businesses battered by the effects of the lockdown.
And like all impending sicknesses to the economy, the banking sector is always the first to feel the pinch of these hardships.

Stanbic Chief Executive Anne Juuko while speaking to Daily Monitor said, “From the start of the pandemic, we recognised the devastating impact Covid- 19 would have on our customers and the ripple effect on the economy. As a result, Stanbic took quick actions to provide the necessary and urgent support to our clients, employees and the wider communities in which they operate. With the precautionary measures in place, we continued to provide banking services and kept 80 per cent of our branches open to ensure our customers had access to our services.”

In addition, she says, they also waived all charges on their digital banking platforms so that customers could transact free of charge on platforms such as online banking and mobile banking systems.

Banks under their umbrella body came up with measures to support clients by offering credit relief programmes to business and personal customers tailored to suit their circumstances and ensure that the businesses are sustained and the impact on the economy is minimised.

The Uganda Bankers Association (UBA), said commercial banks have restructured loans to a tune of Shs2.02 trillion as a result of the effects of the Covid-19 lockdown on businesses.

UBA Executive Director Wilbrod Owor while appearing before the National Economy Committee of Parliament alongside a team from the Central Bank to discuss the impact of coronavirus on the financial sector, said in the first month of restructuring, commercial banks received more than 750,000 restructuring applications. Of these, 755,000 requests worth Shs2.028 trillion were approved.

“About 24 per cent of the requests were from traders, 21. 4 per cent from services, 16.5 percent from agriculture, 16.03 percent from real estate and 9.5 from manufacturing. 11. 5 percent of the applications were from salary loans.
Mr Owor said although the loans have been restructured from three months onward, there might be a need to restructure them further if the situation doesn’t change.

According to Ms Juuko, Stanbic has a portfolio of more than 40,000 Small and Medium Enterprises (SME) clients and a key step the bank took during the pandemic was to offer relief programmes.
“We encouraged all our SME customers whose incomes have been impacted as a result of Covid-19 to apply for a loan repayment holiday based on their unique circumstances. Over 60 per cent of the loans restructured in Stanbic’s portfolio have been SMEs,” she said.

She added, “We have encouraged businesses to sign-up on our digital platforms specific for SMEs where we also applied digital waivers on some of the transactions. Other alternate platforms we provided, include the cash deposit machines and for larger clients the option of enrolling the services of cash in transit.”
Central Bank quantitative easing
Following the Central Bank revision of the CBR in June 2020, banks were expected to follow suit and review their lending rates which are often sticky downwards.

Apart from Stanbic which issued a notice saying “…effective 1st August 2020, we are reducing our prime lending rate to 16.0%,” other banks have been urged to reduce their prime lending rates.

Ms Juuko said with a global event of this magnitude, the pandemic has brought forth many lessons not only for Stanbic but for the sector as whole.

“The first and most important aspect was to place people first. This has always been the priority for Stanbic and taking care of our team member’s health and well-being as we have navigated through the pandemic. We wanted to ensure everyone maintained a good mental state and was given enough time to adjust to the changes happening around them. Managers regularly always checked on their teams and we provided health care support,” she said.

The banking sector is also accelerating the digitisation agenda to ensure they continue to provide more innovative and efficient banking services to their clients.

As a result, banks have reinvented how they serve their clients in order to create real value and the skills sets of their employee teams must be aligned to the new requirements.
“We have, therefore, placed more focus on skills around complex problem solving, critical thinking, cloud, data and cyber security which have now been elevated,” Ms Juuko adds.
Going forward
Ms Juuko said the pandemic presents an opportunity for the banking sector to reshape the way they deliver financial services to their clients. “A lot of work must be done working in close collaboration with the Government to ensure the right measures and policies are put in place to sustain the economy,” she said.

“The impact of Covid-19 on the financial sector is going to be a lagged one. Unlike sectors such as tourism, media, consumer and commercial real-estate where impact has been immediate and can easily be quantified, the impact on the financial sector is always delayed and time for recovery is also expected to take longer (this can reach up to 2 years as witnessed through previous cycles),” she said.