The impact of the COVID second wave on the balance sheets of Indian banks has been less than what was projected before and capital buffers are “reasonably” resilient to withstand future shocks, Reserve Bank of India (RBI) Governor, Shaktikanta Das said in the foreward of Financial Stability Report (FSR) on July 1.
“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,” Das said.
RBI publishes the FSR biannually which reflects the collective assessment of the Sub-committee of the Financial Stability and Development Council (FSDC-SC) on risks to financial stability. FSR report, thus, gives important insights on the state of the economy.
It is important to note in this context that while the recovery is underway, new risks have emerged on the horizon, Das said, adding these include the still nascent and mending state of the upturn, vulnerable to shocks and future waves of the pandemic; 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, Das 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,” the RBI Governor said.
The RBI is on a prolonged pause mode as it fights the twin threats of high inflation and falling economic growth. The RBI has cut the repo rate, the key lending rate, by 250 basis points since February 2019 to support economic growth. One bps is one hundredth of a percentage point.
“In a situation in which economic activity has been disrupted by the pandemic, the financial system can take the lead in creating the conditions for the economy to recover and thrive,” Das said.
For this, banks will need stronger capital positions, good governance and efficiency in financial intermediation, Das said adding such an approach will help financing needs of productive sectors of the economy while the integrity and soundness of banks and financial institutions are secured.
The RBI announced a series of liquidity measures since last year to offer relief to the stressed borrowers across segments and cushion the likely impact of Covid on bank balance sheets. The central bank last year announced a raft of measures including a six month loan moratorium and a one-time loan restructuring exercise, this year it followed up with more measures including special liquidity facility for health sector and additional loan recast facilities.
Banks have aggressively made provisions to face the likely impact of Covid on their balance sheets. With the lockdowns getting lifted in many states, banks are hopeful of a recovery on the ground. India’s economy contracted by 7.3 per cent in FY21 and is projected to rebound to 9.5 per cent growth in FY22.