COVID-19 not only necessitated interest rate cuts across the globe, but also pushed central banks to act faster on planned digitisation of financial transactions. On top of that, online shopping is soaring in the country as people remain confined to their homes.

The State Bank of Pakistan (SBP) slashed interest rates and took certain measures to accelerate the process of digitisation of banking and finance. Both interest rate cut and a renewed focus on online banking should help Pakistan combat the socio-economic challenges posed by Covid-19.

The SBP instructed banks to waive all charges on fund transfers through online banking channels to encourage people to transfer money via mobile phone or internet banking. This has proved helpful for not only individuals but also government departments and NGOs engaged in the distribution of cash handouts to the poor and isolated people amid lockdowns.

The central bank also instructed banks to launch awareness campaigns aimed at limiting the use of currency notes and visits to bank branches. Limited visits to bank branches are undoubtedly important to promote social distancing — the only reliable cure the world has so far explored for Covid-19. A cautious use of currency notes is aimed at reducing the spread of the novel coronavirus via infected bills.

In a separate instruction to all banks, the SBP also directed them to clean, disinfect, seal and quarantine all currency notes being collected from hospitals and clinics.

The renewed focus on online transactions will eventually lead to the digitisation of finance and commerce

Meanwhile, the central bank has promised banks to provide them with sufficient fresh or disinfected cash and even re-usable cash that remained in quarantine for at least 15 days.

Banks are operating as usual but with a limited number of branches to ensure social distancing amid lockdowns. Inquiries made at several big and small banks reveal that they have closed those branches that conduct less critical operations or are fully or partially online.

Banks have also moved into the critical operations mode, which means in-person attendance of critical staff members is being ensured even at regional and head offices. A majority of bank officers is working from home — they are called on a rotation basis even when their in-person attendance becomes necessary. Secured email groups and limited-use internal portals are open for them to ensure the continuation of workflow. Senior executives now regularly conduct online meetings and interact with each other on email and WhatsApp groups.

Stay home, but go digital is the order of the day.

People staying home are buying more online though issues remain in the delivery of stuff by online service providers owing to lockdown restrictions. The Pakistan Software Houses Association has sought a relaxation in those restrictions promising that e-commerce deliveries through third-party logistic services will be in full compliance with post-Covid-19 safety and hygienic rules and regulations.

Taken together, the renewed focus on online financial transactions and greater volumes of e-commerce will eventually lead to the digitisation of finance and commerce.

The distribution of aid in cash and goods to poor and isolated people during lockdowns via mobile phone apps requiring them to get their IDs registered should, meanwhile, help in the documentation drive, financial inclusion and banking of the unbanked to some extent.

On April 1, the SBP and National Institute of Banking and Finance announced the launch of an online national financial literacy programme for the youth. The purpose is to keep kids and the youth engaged during the closure of educational institutions. But financial literacy to be imparted via mobile and e-learning apps through a story-based game format will embolden youngsters to open bank accounts for savings — and thus lead to financial inclusion.

In our banking system, smartphone banking is growing rapidly but it is yet to go a long way in achieving the ultimate goal of total cashless banking. During the last quarter of 2019, about 310.5 million transactions were carried out via mobile-wallets. But the number of over-the-counter transactions stood no less than 49m. E-commerce is evolving but at a slow pace. By the end of last year, the volume of e-commerce totalled Rs100 billion (or only $640m) far smaller than that in Bangladesh ($1.6bn).

After slashing its policy rate by 225 basis points in two instalments within a week to fight recessionary impact of Covid-19, the SBP also incentivised banks to boost consumer finance and enhanced the lending limit for small and medium enterprises (SME). The purpose was to enable more individuals to resort to bank borrowing to sustain themselves and their families in Covid-19-triggered financial hardships.

Banks are now supposed to take on an increased debt burden ratio of 60pc instead of 50pc in consumer lending, which the central bank expects to benefit the existing 2.3m individual borrowers. Bankers say it can enhance this number as they continue to receive more and more personal loan applications every day. Similarly, banks can now lend up to Rs180m to a single SME instead of Rs125m. But unlike personal loans, the number of SME borrowers cannot be expected to rise too fast.

Much depends on how SMEs find space to bolster their businesses amid lockdowns and a slowing economy. In its latest update, Moody’s says Pakistan’s GDP may grow as low as 2pc (against the original target 4pc). Much also depends on how strictly banks examine their credit worthiness to avoid build-ups in bad loans to unmanageable levels in the future.

With the avenues opened for individuals and SMEs for additional borrowings — and that too at lower interest rates and with high hopes about a further fall in the rates and relaxation in bad loan monitoring — one thing is sure. Credit demand will go up. As bank credit goes only to the banked and documented people and businesses, the level of documentation and financial inclusion will grow in the economy.

Published in Dawn, The Business and Finance Weekly, April 6th, 2020