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India's banking system faced COVID with relatively sound capital, liquidity buffers: RBI Guv

RBI Governor Shaktikanta Das (ANI)Premium
RBI Governor Shaktikanta Das (ANI)

  • RBI today released its bi-annual Financial Stability Report in which it stated that gross NPA of banks may rise to 13.5 pc by September 2021 from 7.5 pc a year ago
  • 'Expansion in govt's market borrowing programme following COVID-19 has imposed additional pressures on banks,' Das said in his foreword to RBI's FSR

Reserve Bank of India's Governor Shaktikanta Das on Monday said that India's banking system faced COVID with relatively sound capital, liquidity buffers.

In his foreword to the RBI's bi-annual Financial Stability Report, Das also said, "maintaining banking sector's health remains a policy priority.

He also said that Covid-19 pandemic can result in balance sheet impairments, capital shortfalls, as regulatory reliefs are rolled back.

Das said also said that available accounting numbers obscure true recognition of stress at banks; lenders should raise capital, alter business models.

"Expansion in governme's market borrowing programme following COVID-19 has imposed additional pressures on banks," he said.

"Stretched valuations of financial assets pose risks to financial stability; banks, financial intermediaries need to be cognizant of it," Das said.

The RBI had declared a six-month moratorium which ended in August and later announced a one-time loan recast package to help borrowers. Many banks, especially the private sector ones, have already raised safety capital in the early days of the pandemic.

The Reserve Bank of India on Monday released the Financial Stability Report(FSR), January 2021.

In the report, the central bank said that Indian banks' total gross non-performing assets (GNPAs) may rise to 14.8 percent under a severe stress scenario by September 2021 compared with 7.5 percent in the year-ago period.

RBI Financial Stability Report: Gross NPA of banks may rise to 13.5 pc by September 2021 from 7.5 pc a year ago

Here are the highlights of the report:

-In the initial phase of the COVID-19 pandemic, policy actions were geared towards restoring normal functioning and mitigating stress; the focus is now being oriented towards supporting the recovery and preserving the solvency of businesses and households.

-Positive news on vaccine development has underpinned optimism on the outlook, though it is marred by the second wave of the virus including more virulent strains.

-Policy measures by the regulators and the government have ensured the smooth functioning of domestic markets and financial institutions; managing market volatility amidst rising spillovers has become challenging especially when the movements in certain segments of the financial markets are not in sync with developments in the real sector.

-Bank credit growth has remained subdued, with the moderation being broad-based across bank groups.

-Performance parameters of banks have improved significantly, aided by regulatory dispensations extended in response to the COVID-19 pandemic.

-The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8 per cent in September 2020 from 14.7 per cent in March 2020, while their gross non-performing asset (GNPA) ratio declined to 7.5 per cent from 8.4 per cent, and the provision coverage ratio (PCR) improved to 72.4 per cent from 66.2 per cent over this period.

-Macro stress tests incorporating the first advance estimates of gross domestic product (GDP) for 2020-21 released on January 7, 2021 indicate that the GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under a severe stress scenario. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.

-Network analysis reveals that total bilateral exposures among entities in the financial system increased marginally during the quarter-ended September 2020. With the inter-bank market continuing to shrink and with better capitalisation of banks, the contagion risk to the banking system under various scenarios declined as compared to March 2020.

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