Banks need to shed risk aversion, shore up capital says RBI

Mumbai: Indian banks have to shed their risk aversion to ensure adquate flow of credit to productive sectors and also shore up their capital position to deal with a possible spike in bad loans post Covid 19, Reserve Bank of India (RBI) said in its annual report.

Banks’ risk aversion is impeding the flow of credit to the productive sectors and undermining the role of banks as the principal financial intermediaries in the economy.

“The deterioration in the macroeconomic and financial environment is impinging on asset quality, capital adequacy and profitability of banks. Regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments, deferment of interest payments and restructuring may also have implications for the financial health of banks, unless they are closely monitored and judiciously used,” RBI said.

The RBI has granted a six month moratorium on loan repayments which ends this month. Earlier this month the central bank allowed banks to restructure loans to companies as well as individuals which were due for 30 days or less as of March 1. Such restructuring is likely to cushion the rise the bad loans.

The central bank said that although gross and net non-performing asset ratios had come down in March 2020 it does not reflect the true picture.

“The economic fallout of the pandemic is likely to test this resilience, especially since the regulatory accommodations announced in the wake of the outbreak have masked the consequent build-up of stress. Macro stress tests reported in the July 2020 financial stability report suggest that non-performing assets may surge 1.5 times above their March 2020 levels under the baseline scenario and by 1.7 times in a very severely stressed scenario. The system level CRAR can drop to 13.3 per cent in March 2021 from its March 2020 level under the baseline scenario and to 11.8 per cent under the very severe stress scenario,” RBI said.

Hence it is important that both public and private sector banks shore up capital as the requirements calibrated on the basis of historical loss events, may no longer suffice to absorb post-pandemic losses.

“The Reserve Bank has already advised banks and NBFCs to carry out COVID-19 stress tests and take necessary remedial measures proactively. The ability to raise capital as well as build resilience to ensure financial stability in anticipation of more frequent, varied and bigger risk events than in the past shall be contingent on the governance standards in banks, particularly on strength of risk governance framework,” the cental bank said.

The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banms improved to 14.8% in March 2020 from 14.3% a year ago.