Bankers Fear A Drop In Remittances As World Reels Under Covid-19 Impact
Remittances have been among the steadiest streams of inflows into the India economy, representing close to 2.8% of GDP.
An economic slowdown that has left few nations untouched and a plunge in oil prices that’s turning out to be a double whammy for West Asian nations might hurt worker remittances coming into India.
Remittances, or earnings sent home by those working overseas, have been among the steadiest streams of inflows into the India economy, representing close to 2.8 percent of GDP. This source of inflows is likely to be disrupted due to weaker economic growth, job losses and inward-focused policies adopted by some nations.
No Impact Yet; A Fall Anticipated
Mid-sized lenders such as Federal Bank and South Indian Bank, along with larger public sector banks such as State Bank of India, Punjab National Bank and Bank of Baroda receive the largest inflows through remittances.
Senior executives working at these banks said they have not yet seen a drop in inflows but as more jobs are lost and migrant workers return home, remittances will be impacted.
According to a senior official at Federal Bank, the months of March and April saw a spike in remittances. People tend to transfer their savings back to their home countries during a slowdown as a means to create a kitty back home, the official said on the condition of anonymity,
If the global lockdown and the resultant economic stress continues, people are likely to lose jobs and return home as migrant workers do not usually have citizenship in the countries they work in, this official said. This would eventually lead to a drop in inflows.
Federal Bank accounts for about $10 billion out of roughly $80 billion in inward remittances that India sees annually, the official said.
Even those who don’t lose their jobs and return home could see a decline in earnings and, hence, the capacity to remit money home. The head of retail banking at another mid-sized private bank based in Kerala said that the economic crisis brought on by Covid-19, along with the fall in oil prices, could lead to higher taxes for people living in West Asian countries, which could affect future inflows, the banker said.
One reason why banks have not yet seen a drop in remittances is also the weaker rupee.
A senior official at State Bank of India said the lender had seen higher deposits from non-resident Indians into their accounts. This has been prompted by a drop in the value of the rupee over the last two months, which has encouraged customers to convert their foreign currency savings into local currency, the official said on conditions of anonymity.
According to data available with the Reserve Bank of India, outstanding bank deposits by non-residents stood at Rs 8.64 lakh crore, or 6.7 percent of total deposits, as on March 31, 2019.
What Could Be The Extent Of Decline?
While banks may have not yet seen a fall, an eventual drop in remittances may be inevitable.
The World Bank, in a statement on April 22, said that global remittances might drop 20 percent in 2020 due to the pandemic and shutdown in key economies.
“The projected fall, which would be the sharpest decline in recent history, is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during an economic crisis in a host country,” the World Bank said in its statement.
In 2019 India received about $83 billion worth inward remittances according to World Bank data, which are channeled through banking channels domestically.
According to data from the Ministry of External Affairs, the number of low‐skilled emigrants seeking mandatory clearance for emigration rose slightly by 8 percent to 3,68,048 in 2019.
According to Aditi Nayar, principal economist at ICRA, a drop in remittances could have far reaching impact on domestic consumption, particularly in certain states.
“A decline in remittances is expected to hurt consumption particularly in those states that have recorded a lot of outward-migration. This would have some impact on consumer non-durables, as well as amplify the negative impact of the Covid-19 crisis on demand for durables and discretionary items,” Nayar said.
In a note on April 23, Nomura Global Market Research said that remittances were spent by families back home for basic needs. “This makes the trade-off even more stark for governments in developing countries that are already faced with the lives versus livelihood dilemma in implementing measures to contain local outbreaks. For the Philippines and India, lower remittance inflows will also partly offset the benefit of falling oil prices,” the research house said.