Why Opening Of Lockdown in Red Zones Is Crucial For The Economy?

The opening of red zones remains crucial for the economy to be back on its feet and bounce back. Most of the economic activity takes place in this zone. The government has classified Covid-19 zones into three zones -- green, orange and red (along with containment zones within districts) based on the COVID-19 cases. In the case of red zones, activity is completely restricted, because of the huge infections and further risks of infections. Ironically, this is also the place that has the highest amount of deposits, bank credit and where a lot of economic activity takes place.

Substantial share in bank deposits in the red zones

According to a report by Care Ratings, in absolute terms, overall bank deposits as on December 31, 2019, stood at Rs.132.9 lakh crore as compared with Rs.120.8 lakh crore in the corresponding period previous year.

The share of credit in the red zone, according to the report has remained more or less constant at 62% for the last six quarters, despite the deposit growth being slower than the deposit growth in orange as well as green zone.

This means deposits remain very dominant in the red zone. In fact, most of the large metro cities are now a part of the red zone.

Within the red zones, the western region accounts for the largest share of the deposits at 35%, followed by the southern region (at 23%) and northern region (at 22%). Mumbai with its two districts accounts for 60% share of western region in the red zone, 21% share of the overall red zone and a 13% share of overall deposits. Clearly, Mumbai, which has a significant amount of deposits, is also the city with the highest covid 19 cases.

Significant outstanding bank credit too remains in the red zone

Nearly 72 per cent of outstanding bank credit also is in the red zone. "As a majority of both credit as well as deposits are in the red zone, any delay in the resumption of economic activity could pressure the banks' balance sheets and impact credit costs. Further, the Gross Non Performing Asset (GNPA) levels in the banking sector could increase owing to adversities in the economic activities. The extent of NPAs in the system could push banks to choose their credit portfolios with a higher degree of caution in the coming months," CARE Ratings has said in its report.

Given that the red zones have a serious problem of infections, it is unlikely the lockdown would be opened on May 17, 2020.