The Reserve Bank of India (RBI) released its Financial Stability Report on Friday where the central bank warned that the gross nonperforming assets (GNPA) ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021.
The RBI in its semiannual report further said that if the macroeconomic environment worsens further, the GNPA ratio may escalate to 14.7 per cent under very severe stress.
“The financial system in India remains sound; nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority,” RBI Governor Shaktikanta Das wrote in the foreword of the report.
He further said that in the evolving environment, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all.
Das’s comments come at a time when the credit growth has declined as the coronavirus (COVID-19) pandemic and the subsequent lockdowns have severely hit the businesses and left lakhs of people jobless.
The central banker also said that the financial sector stability is a prerequisite for giving confidence to businesses, investors and consumers and we need to remain extremely watchful and focused.
He wrote that governments, central banks and other public agencies across countries have made coordinated efforts to alleviate financial stress and build confidence. He added that “These policy responses have stabilised the financial system and markets, although the outlook remains highly uncertain.”
Referring to the sharp recovery in the markets from their March lows, Das wrote that the Financial Stability 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,” the central bank governor said. However, he added that of late, the signs of a gradual recovery from the nationwide lockdown are becoming visible.
Going forward, Das said that once we enter the post-pandemic phase, the focus would be on the calibrated unwinding of regulatory and other dispensations.
He asked financial intermediaries to undertake a reappraisal of their business models. The governor said that asset markets have to adapt to a new normal in a non-disruptive manner.
“Contagion risks warrant constant vigilance by all stakeholders in the financial system,” Das noted.
He also said that in the period of social distancing, information technology platforms have worked well and these gains need to be consolidated. “There is no room for complacency on cyber security,” the head of Indian central bank said.
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