Banks need to raise capital on anticipatory basis, says RBI Guv

MUMBAI: Banks need to raise capital on anticipatory basis to build up adequate capital buffers to mitigate risks arising out of coronavirus outbreak, RBI Governor Shaktikanta Das said on Saturday.

He said building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system.

“In such a situation, it has become a lot more important that the banks have to improve their governance, sharpen their risk management skills and banks have to raise capital on an anticipatory basis instead of waiting for a situation to arise. “Proactively, it is necessary for both public and private sector banks to build up adequate capital buffers,” Das said at SBI’S banking and economic conclave.

The economic impact of the pandemic - due to lockdown and anticipated post lockdown compression in economic growth - may result in higher non-performing assets and capital erosion of banks, he said. A recapitalisation plan for public sector and private banks has, therefore, become necessary, he added. For the five years - between 2015-16 and 2019-20 - the government had infused a total of Rs 3.08 lakh crore in public sector banks.

However, the government refrained from committing any capital in the Budget 2020-21 for the PSBS, hoping that the

lenders will raise funds from the market depending on the requirement.

Many private and public sectors such as State Bank of India, PNB, HDFC Bank, ICICI Bank, and Canara Bank are looking to raise capital through various means this fiscal.

The governor also asked banks and non-banking finance companies (NBFCS) to conduct stress test to analyse the impact of COVID-19 on their balance sheets and prepare a plan for any possible risk.

The RBI has recently (June 19 and July 1, 2020) advised all banks, non-deposit taking NBFCS (with an asset size of Rs 5,000 crore) and all deposit-taking NBFCS to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21, Das said.

“Based on the outcome of such stress testing, banks and non-banking financial companies have been advised to work out possible mitigating measures, including capital planning, capital raising, and contingency liquidity planning, among others,” he added.

The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability, the governor noted.

The global financial crisis of 2008-09 and the COVID19 pandemic have dispelled the notion that tail risks to the financial system will materialise only rarely, Das added.