Need For Careful Unwinding Of Measures Post Covid-19: RBI Governor

Reserve Bank of India Governor Shaktikanta Das said a careful unwinding of counter-cyclical measures announced by the banking regulator will need to be initiated after the Covid-19 pandemic subsides.

“The framework for Covid-19-related stressed assets is aimed at striking a balance between financial stability, protecting depositors and preserving economic value of businesses,” Das said at an event organised by Business Standard. But the banking system, he said, will need to look beyond these temporary measures.

“The financial sector should return to normalcy without relying on regulatory measures as the new norm... Not saying that the RBI will unwind all measures taken during the Covid-19,” Das said.

The lockdown to contain the coronavirus pandemic, effective March 25, has shuttered businesses and left millions jobless, pushing India’s economy toward a full-year contraction in more than four decades. To provide relief to borrowers, the RBI has announced a host of measures, including a repayment moratorium to term loan borrowers ending on Aug. 31, easier bad loan recognition norms for banks and other lenders, a Covid-19-focused restructuring scheme for companies and individuals, special liquidity windows for non-banking finance companies and mutual funds.

The banking regulator also announced a one-time restructuring of loans, which sector experts saw as a return to forbearance since banks were allowed to not downgrade restructured accounts.

According to Das, there obviously is going to be a severe impact on banks’ balance sheets. But the way lenders react and respond to the challenge will be more important. Financial institutions will have to walk a tightrope of recovery in their return to normalcy, he said.

The regulator has already asked banks and large NBFCs to assess the impact of Covid-19 on asset quality, liquidity, profitability and capital adequacy. Large private lenders such as Axis Bank Ltd., ICICI Bank Ltd., Yes Bank Ltd. and Kotak Mahindra Bank Ltd. have raised funds to meet their needs, while IndusInd Bank has announced plans to do so.

RBI is also ensuring that this process is vigorously carried forward by other banks and NBFCs, Das said.

The banking system, he said, is also dealing with an inefficient risk management system, resulting in higher frauds. The central bank, in its annual report for 2019-20, said banking frauds have more than doubled year-on-year.

Banks which are being overtly risk averse to self immunise in the current environment should remember that this will affect their bottom line, Das said. Risk propensity should be aligned with the risk appetite of individual banks and their risk management should be strong enough to smell any near-term vulnerability, he said.

“An effective early warning system and forward-looking stress testing should be part of risk management frameworks for banks,” he said. “They should be able to pick up signals of stress and take proactive remedial measures within the RBI’s resolution framework.”

As the country comes out of the pandemic, the banking system will need to do a complete revamp of their business strategies and orientation. “Banks need to support sectors that have potential to bounce back and look out for sunrise sectors.”