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Indian economy showing signs of returning to normal: RBI Governor

 


KOLKATA: The economic impact of the coronavirus pandemic may lead to an increase in non-performing assets and an erosion of bank capital as repayment pressure on non-bank financial companies (NBFC) and mutual funds emerges as Critical stress points in the financial system, Reserve The Governor of the Bank of India, Shaktikanta Das, said.

Ignoring these risks, the governor declared that the political action of the RBI would depend on the course of the crisis, even if he observed that the medium-term prospects remain uncertain and depend on the COVID-19 curve.

Building buffers and raising capital in such a situation becomes imperative to strengthen the internal defenses of financial intermediaries against risk and to ensure credit flows, said the governor, alluding to the fact that shocks to the financial system are more common than once. in a lifetime of events “to” once every ten years “.

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

The global financial crisis of 2008-2009 and the COVID-19 pandemic in 2020 rocked the financial system in the space of a decade. The current crisis could have a longer impact on the Indian economy, which is expected to contract in FY21 for the first time in four decades.

“We still don’t know when the supply chains will be fully restored; how long will it take for demand conditions to normalize; and what kind of lasting effects the pandemic will have on our potential growth, “said the Governor.

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

The gross ratio of non-performing assets (NPA) and the net NPA ratio of all banks were 8.3% and 2.9% in March 2020, against 9.1% and 3.7% a year earlier, the regulator forcing banks to clean up their balance sheets in a calibrated manner since 2016.

The overall capital adequacy ratio of banks improved to 14.8% as in March 2020, against 14.3% a year ago. The CRAR of public sector banks had improved to 13% – with a capital injection of Rs 3.08 lakh crore by the government since 2015-2016 – by 12.2% over the same period.

Symptoms of weak banks are poor asset quality, poor profitability, loss of capital, excessive leverage, excessive risk exposure, misconduct and liquidity problems.

These different symptoms often appear together. “We attach particular importance to the evaluation of the business model, governance and insurance functions (compliance, risk management and internal audit functions), because these have been the subject of heightened oversight concerns, “said the regulator.

The regulator advised all financial intermediaries to assess the impact of COVID-19 on their balance sheets, the quality of assets, liquidity, profitability and capital adequacy for the 2020-2021 financial year and develop possible mitigation measures. “The idea is to ensure the continuity of the supply of credit to different sectors of the economy and to maintain financial stability,” said Das.

In the midst of the lockdown, RBI improves the off-site monitoring mechanism to “feel the distress”, so that preventive actions can be taken if necessary. He works to build market surveillance capabilities using personal and technological information.

Meanwhile, mutual funds have become major investors in market instruments issued by the NBFCs, which is why the development of an unfavorable feedback loop and the associated systemic risk warrant timely and targeted policy interventions. The increase in the share of bank loans to NBFCs and the continued tightening of market-based financing facing 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. At the central bank, we strive to maintain the balance between preserving financial stability, maintaining a strong banking system and maintaining economic activity. ”



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