Indian economy showing signs of returning to normalcy: RBI Governor

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KOLKATA: The economic impact of the coronavirus pandemic may lead to higher non-performing assets and capital erosion of banks while the redemption pressure on non-banking finance companies (NBFCs) and mutual funds are emerging as crucial stress points in the financial system, Reserve Bank of India Governor Shaktikanta Das said.

Flagging off these risks, the governor said that RBI’s policy action would depend on how the crisis unfolds even as he observed that the medium-term outlook still remains uncertain and depends on the COVID-19 curve.

Building buffers and raising capital in such a situation becomes imperative to strengthen the internal defences of financial intermediaries against the risks and to ensure credit flow, the governor said, alluding that the shocks to the financial system turning out to be more frequent than a ‘once in a lifetime events’ to ‘once in a decade’.

“A recapitalisation plan for public sector banks and private banks has, therefore, become necessary,” Das said on Saturday at a virtual banking conclave organised by State Bank of India.

The global financial crisis of 2008-09 and the COVID-19 pandemic in 2020 have rocked the financial system within a span of a decade. The current crisis may leave a longer impact on Indian economy, which is predicted to contract in FY21 for the first time in four decades.

“It is still uncertain when supply chains will be restored fully; how long will it take for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth,” the Governor said.

“Accordingly, the minimum capital requirements of banks, which are calibrated based on historical loss events, may no longer be considered sufficient enough to absorb the losses. Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability,” Das said, asking banks to make risk management in tune with the emerging risks.

The gross non-performing assets (NPA) ratio and net NPA ratio of all banks stood at 8.3 percent and 2.9 percent in March 2020, compared to 9.1 percent and 3.7 percent a year back, with the regulator forcing banks to clean their balance sheet in a calibrated way since 2016.

The overall capital adequacy ratio for banks improved to 14.8 percent as in March 2020, compared to 14.3 percent a year ago. The CRAR of public sector banks had improved to 13 percent — with Rs 3.08 lakh crore capital infusion by the government since 2015-16 — from 12.2 percent over the same period.

The symptoms of weak banks are the poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct, and liquidity concerns.

These different symptoms often emerge together. “We are placing special emphasis on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions), as these have been the areas of heightened supervisory concern,” the regulator said.

The regulator has advised all financial intermediaries to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21 and to work out possible mitigating measures. “The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability,” Das said.

Amid lockdown, RBI is enhancing off-site surveillance mechanism to ‘smell the distress’, so that pre-emptive actions can be taken if required. It is working towards strengthening the supervisory market intelligence capabilities, with the help of both personal and technological intelligence.

Meanwhile, mutual funds have emerged as major investors in market instruments issued by NBFCs, which is why the development of an adverse feedback loop and the associated systemic risk warrants timely and targeted policy interventions. Increasing share of bank lending to NBFCs and the continuing crunch in market-based financing faced by the NBFCs and Housing Finance Companies (HFCs) also need to be watched carefully, he said.

“The need of the hour is to restore confidence, preserve financial stability, revive growth and recover stronger. At the central bank, we strive to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.”

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Tagged coronavirus, nationwide lockdown, New Delhi, reserve bank of india, Shaktikanta Das, supply shocks

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