WITH the staggered easing of the lockdown, the Indian economy may be showing signs of getting back to normalcy but there are a string of uncertainties — from supply chains, state of banks and demand to the pandemic’s effects on future growth, Reserve Bank of India Governor Shaktikanta Das said on Saturday.
Calling the Covid outbreak the “worst health and economic crisis in the last 100 years during peace time with unprecedented negative consequences for output, jobs and well-being,” Das cautioned on the road ahead.
Speaking at a banking conclave organised by State Bank of India, the RBI Governor called for “legislative backing” for “some kind” of a resolution corporation to tackle the increase in stress levels in the financial sector.
Stating that it’s uncertain how long will it take for “demand conditions to normalise”, Das said: “The need of the hour is to restore confidence, preserve financial stability, revive growth and recover stronger.”
Das said the central bank has asked banks to undergo stress tests, focus on risk management and raise capital even as he cautioned that redemption pressure on finance companies and mutual funds “needs close monitoring”.
“While the multi-pronged approach adopted by the Reserve Bank has provided a cushion from the immediate impact of the pandemic on banks, the medium-term outlook is uncertain and depends on the Covid-19 curve,” Das said. “Covid-19 pandemic, perhaps, represents so far the biggest test of the robustness and resilience of our economic and financial system,” he said, adding that the Government’s “targeted and comprehensive reform measures,” should help in supporting growth.
The Governor did not indicate how RBI was planning to unwind the measures it had introduced to tackle the challenges posed by the pandemic. “Post containment of Covid-19, a very careful trajectory has to be followed in orderly unwinding of counter-cyclical regulatory measures and the financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm,” Das said.
The RBI had cut the repo rate by 135 basis points since February this year, pumped liquidity to the tune of Rs 9.57 lakh crore and announced several measures like loan moratorium for six months to ease the pain in the financial system.
Das said the RBI had asked banks and finance companies to undertake a stress test. “We have 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 NBFCs have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning, among others, Das said.
“The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability,” he said.
Das said that the economic impact of the lockdown and the anticipated post lock-down compression in economic growth may result in higher non-performing assets and capital erosion of banks.
“A recapitalisation plan for public sector banks and private banks has become necessary. While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring,” he said.
Das added that it was imperative that the approach to risk management in banks should be in tune with the realisation of more frequent, varied and bigger risk events than in the past. “Banks have to remember the old saying that care and diligence bring luck,” he said.
“To paraphrase Oscar Wilde, being caught unprepared in the face of a shock may be regarded as a misfortune but to be caught unawares more than once may be a sign of carelessness,” Das said.
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