The dent on balance sheets and performance of financial institutions in India has been much less than what was projected earlier, although a clearer picture will emerge as the effects of regulatory reliefs fully work their way through, says RBI Governor
The impact of the second covid wave on the balance sheet of banks has been much less than what was projected earlier, and capital and liquidity buffers are resilient to withstand future shocks, said Reserve Bank of India Governor Shaktikanta Das in the foreword of the Financial Stability Report released by the central bank on Thursday.
“The dent on balance sheets and performance of financial institutions in India has been much less than what was projected earlier, although a clearer picture will emerge as the effects of regulatory reliefs fully work their way through. Yet, capital and liquidity buffers are reasonably resilient to withstand future shocks, as the stress tests presented in this report demonstrate," he said.
FSR is a bi-annual report, which reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability, and the resilience of the financial system.
That said RBI noted that banks should brace themselves for another wave of stress as bad loans may touch 9.8% of their loan book by the end of the fiscal year from 7.5% in FY21. Mint had released the excerpts of the report on Thursday.
To be sure, this latest projection is lower than the earlier NPA projection of 13.5% by September.
Within the bank groups, RBI stress tests showed that public sector bank’s gross non-performing ratio of 9.54 per cent in March 2021 could touch 12.52 per cent by March 2022. Private sector banks could see bad loans touching 5.82% and foreign banks could see bad loans at 4.9% by March 2022.
However, lenders are well capitalised to weather this stress, the central bank said. The capital risk-weighted assets ratio of banks may fall marginally to 15.5% by March 2022 as the base-case scenario from 15.8% as of March this year. In the worst-case scenario where severe stress results in bad loans rising to 11.2% of total loans, banks may find capital adequacy ratios drop to 13.3%. All these outcomes on capital are higher than the minimum regulatory requirement of 11.5% that includes 2.5% of capital conservation buffer. The stress tests assume a 9.5% growth in gross domestic product (GDP), a 5.1% average retail inflation and metrics for four other macroeconomic data for various scenarios
In the foreword, Das also noted that while the recovery is underway, new risks have emerged on the horizon including international commodity prices and inflationary pressures, global spillovers amid high uncertainty, and rising incidence of data breaches and cyber attacks.
Accordingly, sustained policy support accompanied by further fortification of capital and liquidity buffers by financial entities remains vital, he said.
“Even as our financial system remains on the front foot and prepares to intermediate in meeting the resource needs of an economy on the move towards a brighter post-pandemic future, the priority is to maintain and preserve financial stability," he added.
Das said that the financial system can take the lead in creating the conditions for the economy to recover and thrive. For this, banks have to ensure stronger capital positions, good governance and efficiency in financial intermediation so that financing needs of productive sectors of the economy are met.
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