Mumbai- RBI Governor Shaktikanta Das on Saturday warned of higher bad loans as a direct fallout of the pandemic, and said the medium-term outlook for the economy remains uncertain, with supply chains and demand yet to be fully restored.
A protracted lockdown, which began on March 25 and continued in various phases albeit with significant easing of restrictions since early May, has resulted in the severe disruption of industrial production and consumer spending, with GDP growth forecast to contract sharply in April-June, pushing Indian economic growth for the 2020-21 into a deep recession.
"The economic impact of the pandemic - due to lock-down and anticipated post lock-down compression in economic growth - may result in higher non-performing assets and capital erosion of banks," Das said at the 7th SBI Banking and Economics Conclave.
A recapitalisation plan for public sector banks (PSBs) and private banks (PVBs) has, therefore, become necessary, he said, adding despite the substantial impact of pandemic on daily lives, the financial system of the country, including all the payment systems and financial markets, are functioning without any hindrance.
"The Indian economy has started showing signs of getting back to normalcy in response to the staggered easing of restrictions. It is, however, still uncertain when supply chains will be restored fully; how long will it take for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth," he said.
Das said the 2008 global financial crisis and the current one show that such economic shocks have "fatter tails" than generally believed, and that the country's financial system should have larger capital buffers.
The RBI, he said, has been guided by the age-old wisdom that ascribes the role of Lender of Last Resort (LOLR) to the central bank.
It has cut interest rates by 115 basis points in response to the pandemic, taking the total policy rate reduction to 250 basis points since February 2019, he said.
Also, the Reserve Bank of India (RBI) has provided liquidity of Rs 9.57 lakh crore, eased some bad loan provisioning norms and allowed loan moratoriums for retail customers.
Das said targeted and comprehensive reform measures already announced by the government should help support the country's potential growth.
Also, special emphasis is being placed on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions), as these have been the areas of heightened supervisory concern.
"RBI has taken a number of important historic measures to protect the financial system and support the real economy in the current crisis.
"While the eventual success of our policy responses will be known only after some time, they appear to have worked so far," he said.
Possibly in a vastly different post-COVID global environment, reallocation of factors of production within the economy and innovative ways of expanding economic activity could lead to some rebalancing and emergence of new growth drivers, Das added.
The central bank, he said, strives to maintain the balance between preserving financial stability, maintaining banking system soundness and sustaining economic activity.
"Post containment of COVID-19, a very careful trajectory has to be followed in orderly unwinding of counter-cyclical regulatory measures," he said.
The financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm, he added.
The conventional and unconventional monetary policy and liquidity measures by the RBI have been aimed at restoring market confidence, alleviating liquidity stress, easing financial conditions, unfreezing credit markets and augmenting the flow of financial resources to those in need for productive purposes, he said.
"The broader objective was to mitigate risks to the growth outlook while preserving financial stability," he added.
Das said despite the substantial impact of the COVID-19 pandemic, the country's financial system are functioning without any hindrance.
"RBI is making continuous assessment of the changing trajectory of financial stability risks and upgrading its own supervisory framework to ensure that financial stability is preserved," he said.
Banks and financial intermediaries have to be ever vigilant and substantially upgrade their capabilities with respect to governance, assurance functions and risk culture, Das noted.
The governor also said banks will have to improve their governance, sharpen their risk management and raise capital on an anticipatory basis instead of waiting for a situation to arise.
When a natural calamity happens the repayment behaviour of certain borrowers gets impacted and that does affect the NPA position of banks, he said.
In such a situation, it has become a lot more important that the banks improve governance, sharpen risk management skills and raise capital on an anticipatory basis instead of waiting for a situation to arise. Proactively, it is necessary that both public and private sector banks to build up adequate capital buffers, Das said.
He said as the lockdown has obstructed RBI's on-site supervision to an extent, the central bank is further enhancing its off-site surveillance mechanism.
The objective of the off-site surveillance system would be to 'smell the distress', if any, and be able to initiate pre-emptive actions, he added.
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