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Banks must maintain the flow of credit to the real economy

January 22, 2021
thevaultzby thevaultz
in Banking
0
COVID-19 introduces several risks in the banking sector

The Centre for Regulatory Strategy has intimated that banks must be looking to maintain the flow of credit to the real economy even as we’ve entered the year 2021.

This is very necessary as the resurgence of the pandemic appears to be more delicate than before. However, “many challenges lie ahead for the banking sector, with significant credit losses appearing inevitable in 2021 as some government unwind their support measures”.

The global crises which started in early 2020 left central banks with little choice but to respond decisively to restore stability and order to financial market and as such there were some leverages given to banks.

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Some of the responses by banks during the pandemic has been the increase in credit provided to the non-financial private sector, and the levels of public sector assets held.

Although Central bank actions coupled with widespread government fiscal support measures have helped cushion the blow to the real economy and financial, there are concerns raised about elevated sovereign debt levels.

“We expect bank supervisors to take heed of lessons learned the hard way” amid the crises, the Centre for Regulatory Strategy opined, adding that “we also expect a continued emphasis on the ability and willingness” of the financial sector to contribute to economic recovery.

The Centre for Regulatory Strategy further asserted that financial sector should consider contributing long-term capital towards supporting small and medium-scale enterprises (SMEs) and infrastructure projects, providing funding to certain illiquid assets that create real long-term value.

To fulfill these roles, however, the Centre for Regulatory Strategy has indicated that there is a need to focus on three crucial areas and for the financial sector to continue to be regarded as part of the crisis solution, they will need to demonstrate progress in addressing these challenges. These crucial areas include:

First of all, supporting sustainability objectives which will mean banks must take the opportunity to help society tackle climate-related risks in their role as investors, advisers, and lenders to the real economy. This will therefore require the developing of climate stress test, while also pushing firms to develop their own capabilities to assess their resilience against climate risk. Additionally, disclosure of environmental, social and corporate governance will also be mandatory.

Next, is to create cultures that deliver good customer outcomes and embrace social purpose, with regulators paying increasing attention to banks treatment of customers experiencing financial distress as the effects of the pandemic linger, and particularly as support measures are gradually withdrawn. As such, in dealing with customers, banks must consider the appropriateness of further forbearance and engage customers proactively before payment deadlines.

Banks must maintain the flow of credit to the real economy

Lastly, is the need to inculcate diversity and inclusion. This will mean financial organizations will need to come up with innovative products aimed at the vulnerable to promote financial inclusion.

Looking ahead, the financial sector will have to continue to make difficult decisions due to the highly uncertain economic outlook as they seek to also play their role in the economic recovery.


Also, the Banking sector must therefore prioritize ways to maintain financial and operational resilience while meeting customer needs and playing a part in alleviating the impact of the crises.

Tags: Bankscreditreal economy
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