Current crisis worst of century: RBI

MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das asked banks and finance companies on Saturday to conduct so-called stress tests even as he emphasised that the central bank’s primary focus will be on reviving growth and ensuring the stability of the financial system.

The economic fallout of the coronavirus disease pandemic may lead to higher non-performing assets, or bad loans, and capital erosion at Indian banks, he warned, terming the Covid-19 outbreak the worst economic and health crisis in a century.

A recapitalisation plan for public sector banks and private banks has become necessary because of the compression in economic growth during and after the Covid-19 lockdown, Das said at the seventh banking and economics conclave organised by the State Bank of India (SBI), stressing the need for banks to raise capital and build cash buffers to ensure credit flow and resilience of the financial system, and to be prepared for more frequent and bigger risk events.

“While the NBFC [non-banking financial company] sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds needs close monitoring,” Das said at the digital conference, referring to the emerging stress points in the financial system. “Mutual funds have emerged as major investors in market instruments issued by NBFCs, which is why the development of an adverse feedback loop and the associated systemic risk warrants timely and targeted policy interventions.”

“Increasing share of bank lending to NBFCs and the continuing crunch in market-based financing faced by the NBFCs and Housing Finance Companies (HFCs) also need to be watched carefully,” he cautioned.

The RBI governor ended his speech on a cautiously optimistic note, saying the financial system was functioning well and the economy had started showing signs of getting back to normalcy after the easing of lockdown restrictions. “It is, however, still uncertain when supply chains will be restored fully; how long will it take for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth.”