In the foreward of the Financial Stability Report (FSR) on July 1, Reserve Bank of India (RBI) Governor, Shaktikanta Das said that the impact of the COVID second wave on the balance sheets of Indian banks has been less than what was projected before and capital buffers are “reasonably” resilient to withstand future shocks.
“The dent on balance sheets and performance of financial institutions in India has been much less than what was projected earlier, 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,” Das said.
It is important to note in this context that while the recovery is underway, new risks have emerged on the horizon, Das said, adding these include the still nascent and mending state of the upturn, vulnerable to shocks and future waves of the pandemic; international commodity prices and inflationary pressures, global spillovers amid high uncertainty and rising incidence of data breaches and cyber-attacks.
Under the RBI’s macro stress tests, the gross non-performing asset (GNPA) ratio of scheduled commercial banks may increase from 7.48 per cent in March 2021 to 9.8 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario, although the banks have sufficient capital, “both at the aggregate and individual level, even under stress”, the FSR noted.
The report is a 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. All regulators take part in making the report, which is released twice a year.
The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) increased to 16.03 per cent and the provisioning coverage ratio (PCR) stood at 68.86 per cent in March 2021. Therefore, the capital with banks is well above the regulatory requirement of 9 per cent of CRAR.
“Going forward, as banks respond to credit demand in a recovering economy, they will need to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress,” the FSR stated.
