Banks better placed to withstand shocks: Das
MUMBAI: The impact of the pandemic’s second wave on the balance sheet of banks is far more modest than expected, and their capital and liquidity buffers are strong enough to weather any unforeseen surprises, said Reserve Bank of India governor Shaktikanta Das.
“The dent on balance sheets and performance of financial institutions has been much less than what was projected, 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,” said Das in his foreword to the Financial Stability Report (FSR) released by the central bank.
FSR is a bi-annual report that reflects the collective assessment of the sub-committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system.
To be sure, RBI also noted that banks should brace themselves for another wave of stress as bad loans may touch 9.8% of their loan books by the end of this fiscal from 7.5% in FY21, according to excerpts from the report published in Mint on Thursday.
RBI’S latest forecast is, however, lower than its projection of 13.5% for banks’ bad loans by September.
Within banking categories, RBI stress tests showed that public sector banks’ gross nonperforming ratio of 9.54% in March could rise to 12.52% within a year. Private sector banks could see bad loans touching 5.82%, and foreign banks could see bad loans at 4.9% by March 2022.
Lenders are well-capitalised and can weather this stress, the central bank said. The capital risk-weighted assets ratio of banks may fall marginally to 15.5% by March 2022 as the base-case scenario from 15.8% as of March this year. In the worst-case scenario where severe stress results in bad loans rising to 11.2% of total loans, banks may find capital adequacy ratios drop to 13.3%. All these outcomes on capital are higher than the minimum regulatory requirement of 11.5%. The stress tests assume a 9.5% growth in gross domestic product (GDP), a 5.1% average retail inflation and metrics for four other macroeconomic data for various scenarios.
In the foreword, Das also noted that while the recovery is underway, new risks have emerged, including 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, he said.
“Even as our financial system remains on the front foot, the priority is to maintain and preserve financial stability,” he added.
Das said the financial system can take the lead in creating conditions for the economy to recover and thrive. For this, banks have to ensure a stronger capital position, good governance and efficiency in financial intermediation so that the financing needs of productive sectors of the economy are met.