In his foreword to the bi-annual financial stability report (FSR) released on Friday, Shaktikanta Das said that financial intermediaries like bank and other financial institutions should augment capital and improve resilience on a top priority basis
Reserve Bank of India Governor Shaktikanta has said that the country’s financial system remains strong although extreme risk aversion in the current scenario could be counterproductive.
In his foreword to the bi-annual financial stability report (FSR) released on Friday, Das said that financial intermediaries like bank and other financial institutions should augment capital and improve resilience on a top priority basis.
Das said that preserving long-term financial stability is critical for ensuring recovery from the pandemic. He added that post pandemic, the focus would be on “calibrated unwinding of regulatory and other dispsensations."
“Financial sector stability is a prerequisite for giving confidence to businesses, investors and consumers. We need to remain extremely watchful and focused," said Das in the foreword.
Das also added that financial intermediaries will have to undertake reappraisal of their business models and asset markets have to adapt to a new normal in a non-disruptive manner. He warned that contagion risks warrant constant vigilance by all stakeholders in the financial system.
Further Das added that the FSR report coincides with a growing disconnect between the movements in certain segments of financial markets and real sector activity. “The pandemic hit India in a period of growth moderation. The ensuing disruptions in demand conditions and supply chains have been aggravated by global spillovers. Of late, signs of a gradual recovery from the nationwide lockdown are becoming visible," he said.
Two weeks ago Das had said that the economic impact of the pandemic may result in higher non-performing assets and capital erosion of banks. Speaking at the SBI economic conclave, he had said that the banks should conduct periodic Covid stress test on their balancesheets to remain alert and also raise capital to deal with any shocks that could come up due to the pandemic. While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring.
Many banks like Kotak Mahindra Bank, RBL, Bank of Baroda, Indusind Bank are looking to raise capital by selling shares as they seek to cushion their balancesheet from Covid-19 shocks. According to a Credit Suisse report in May, banks may need to raise $20 billion in additional capital for increased provisioning over the next 12 months as credit quality weakens.
The FSR has predicted that capital to risk weighted assets ratio (CRAR) may fall from 14.6% in March 2020 to 13.3% by March 2021. The stress test conducted indicate that five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario. The common equity Tier I (CET 1) capital ratio of banks may decline from 11.7% in March 2020 to 10.7% under the baseline scenario and to 9.4 per cent under the very severe stress scenario in March 2021.
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