The Covid-19 pandemic has severely impacted the business of half-dozen key sectors including aviation, automobile and the Micro, Small and Medium Enterprises (MSME) sectors, the central bank says in its financial stability report.

As per the latest report by Reserve Bank of India (RBI), tourism and hospitality, construction, aviation, automobile and the MSME sectors have been the worst impacted sector due to the Covid-19 Pandemic.

Commenting on the housing sector, the report said with the Covid-19 outbreak, demand and liquidity constraints intensified. House sales and launches, which had declined by 16 per cent and 35 per cent (y-o-y), respectively, during Q3, FY-20 got further pulled down by around 26 per cent and 51 per cent respectively, during Q4, FY-20. 

"A nation-wide ebbing of consumer confidence triggered a preference for purchases of completed houses, which adversely affected the sale of under construction houses. As new house launches plunged, the stock of unsold houses shrank and the inventory overhang," it says. Under-construction projects constitute 70-80 per cent of the unsold inventory. House price growth remained contained in most cities in 2019-20, it adds. With the suspension of construction activities across the country from mid-March, completion of under-construction projects is likely to be delayed, constraining new demand, the report mentions. 

ILL-EFFECTS FOR 3-5 YEARS

According to the survey conducted within the report, the findings suggest that the ill-effects of Covid may remain for next 3-5 years and may impact the quality of credit in the banks’ books, the general risk-taking ability of entrepreneurs, investments in capital markets and real estate, and the saving pattern of households.

In the survey, the categories that appeared in the ‘very high risk’ categories include global growth, domestic growth, fiscal deficit. This is the first time that the survey has thrown up so many ‘very high-risk’ categories, which is an indicator of the likeliness of the risk event happening. In the previous survey, no item was classified under this category.

The number of ‘high risk’ items have doubled to 16, the report pointed. The new high-risk items include contagion risk following any other sovereign defaulting, the inability of corporate to raise foreign borrowings, risk that foreign portfolio investment and foreign direct investment may flatten. The domestic risks that are categorized as very high include slowing down of infrastructure spending, real estate price crash, rupee volatility, stock market volatility, liquidity risk and social unrest arising out of increasing inequality.

In the financial sector, the existing stock of non-performing assets in the banking system and bankers’ risk aversion remain big worries and impediments to economic growth. About 56 per cent of the respondents opined that the prospects of Indian banking sector are going to deteriorate considerably in the next one year, as earnings of the banking industry may be negatively impacted due to slow recovery after the lockdown, lower net interest margins, elevated asset quality concerns and a possible increase in provisioning requirements.

SOUND FINANCIAL SYSTEM

"We are in the midst of an unprecedented situation brought on by the COVID-19 pandemic, which has extracted unconscionable human and economic casualties. Its spread, intensity and duration has imparted extreme uncertainty not experienced in our lifetime. The loss of livelihood has been particularly severe on the vulnerable and disadvantaged," RBI Governor Shaktikanta Das said in his 'foreword' to the report.

The report, says Das, coincides with a growing disconnect between the movements in certain segments of financial markets and real sector activity. "The pandemic hit India in a period of growth moderation. The ensuing disruptions in demand conditions and supply chains have been aggravated by global spillovers. Of late, signs of a gradual recovery from the nationwide lockdown are becoming visible," he said.

"The financial system in India remains sound; nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority.," Das adds.