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Close on the heels of financial sector mavens pointing out a need for the Reserve Bank of India (RBI) to upgrade its model for conducting stress tests on banks, the central bank’s board has taken up the matter. Discussions have begun on how best to rework them.

One suggestion is to look beyond prospective pileups of bad assets (and the hollowing of banks’ capital cushions) under various probabilistic scenarios of economic crisis, and crunch out numbers for other variables that could alert us to systemic risks, too. The robustness of RBI’s current model for adverse event projections of impaired loans and capital adequacy has also been questioned. A few estimates in last week’s Financial Stability Report did not square with data in previous reports. Either the earlier ones were too alarmist, or the latest one underestimates the vulnerability of our banking sector. To settle doubts and reinforce the credibility of the exercise, RBI must review its stress-testing methods. This is all the more important under the current circumstances, now that covid-impact mitigation efforts have pushed India into a data fog of sorts. If instability were to loom, we mustn’t be caught napping.

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