Lenders Asked To Conduct Covid-19 Stress Tests, Raise Capital, Says RBI’s Shaktikanta Das
Shaktikanta Das, governor of the Reserve Bank of India (RBI), poses for a photograph following an interview at the central bank in Mumbai, India. (Photographer: Kanishka Sonthali/Bloomberg)

Lenders Asked To Conduct Covid-19 Stress Tests, Raise Capital, Says RBI’s Shaktikanta Das

Reserve Bank of India governor Shaktikanta Das on Saturday said that the central bank’s top most priority is to revive growth and ensure financial stability amid the Covid-19 crisis.

To ensure that financial stability is not compromised, banks and NBFCs have been asked to conduct stress tests to judge the impact of the coronavirus pandemic on their balancesheets, capital adequacy and stressed assets. Based on the outcome of the stress tests, banks and financial institutions should take steps to mitigate risks, Das said.

In particular, Das advised banks, both private sector and public sector, to raise capital preemptively. “Raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system,” Das emphasised.

We have, on June 19 and again on July 1, advised all banks and NBFCs to do Covid stress tests and analyse the impact on balancesheet, asset quality, liquidity, profitability and capital adequacy for FY21 and FY22. 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. 
Shaktikanta Das, Governor, RBI

Das’ comments, while speaking at the SBI Banking & Economic Conclave, come at a time when the impact of the Covid-19 crisis on balancesheets remains uncertain. A moratorium on loan repayments, which will extend till end-August, has delayed reporting of any stress on bank balancesheets.

A number of private sector banks have already raised capital or announced an intent to do so. Das’ comments will likely speed up the process.

The fact that non-performing assets will rise is not surprising, Das said, while adding that what is important is preemptively addressing these risks.

The economic impact of the pandemic—due to the lockdown and anticipated post-lockdown compression in economic growth—may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs and private banks has, therefore, become necessary.
Shaktikanta Das, Governor, RBI

More Than ‘Once In A Lifetime’ Risk

Das said that the global financial crisis and the Covid-19 pandemic have dispelled the notion that tail risks to the financial system will materialise only rarely.

“Shocks to the financial system dubbed as ‘once in a lifetime events’ seem to be more frequent than even ‘once in a decade’,” Das said. Accordingly, minimum capital requirements, calibrated to “historical loss events” may no longer be considered sufficient. “Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability.”

Das added that risk management at banks must take into account these seemingly more frequent, varied and bigger risk events.

Banks have to remember the old saying that care and diligence bring luck. 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.
Shaktikanta Das, Governor, RBI

Strengthening RBI’s Supervisory Function

Das said that the regulator has strengthened its off-site surveillance and mechanism to catch any vulnerabilities emerging in the financial system early. Both the off-site and market intelligence systems have been strengthened, Das said.

“As the lockdown has obstructed our on-site supervisory examination to an extent, we are further enhancing our 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 preemptive actions,” he said.

The off-site assessment framework, Das said, takes into account macro and micro variables, aimed at identifying vulnerable sectors, borrowers as well as supervised entities.

Other Highlights Of The Speech

  • The Covid-19 pandemic is the worst health and economic crisis seen in the last 100 years.
  • MPC has cut the repo rate by 115 basis points cumulatively since the outbreak of the Covid crisis. Since February 2019, repo rate has been cut by 250 basis points.
  • Liquidity measures announced by the RBI so far add up to about Rs 9.57 lakh crore and are equivalent to 4.7% of nominal GDP based on FY20 data.
  • The financial sector saw an improvement in indicators in FY20. The capital adequacy ratio of scheduled commercial banks stood at 14.8% in March 2020. For PSU banks this ratio stood at 13%. The gross NPA ratio across scheduled commercial banks stood at 8.3%, while the net NPA ratio stood at 2.9% as of March 2020. The provision coverage ratio stood at 65.4%.
  • A public-private partnership model to resolve stress in a bank has emerged after Yes Bank episode. The merger route used so far pulls down a strong bank.
  • Need legislative backing for a 'Resolution Corporation' to deal with resolution and revival of stress financial firms.
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