India’s Central Bank Urges Lenders to Be Less Averse to Risk
(Bloomberg) -- India’s central bank chief said it’s crucial for lenders to build sufficient loan provisions and become less averse to risk so they can help the economy recover from the pandemic-induced economic slump.
The nation’s banking sector remains stable but lenders need to revise their business strategies, Reserve Bank of India Governor Shaktikanta Das said Thursday. Remaining overly risk-averse is “self-defeating” for banks, Das said during an event organized by the Business Standard newspaper.
“Extreme risk aversion is certainly not desirable,” he said. While the banking regulator wants lenders to expand businesses to new areas, he also urged banks to be more aware of risks and raise capital “vigorously” to “ensure credit flow and resilience of financial system.”
Indian authorities are taking unprecedented steps to support the country’s financial sector, which has been hit hard by the coronavirus. The RBI relaxed bad loan classification rules by allowing lenders the power to restructure certain loans when a loan moratorium expires at the end of this month. Banks are struggling to accelerate credit growth and are confronting a mounting bad debt pile that’s set to swell to a two-decade high.
“Going ahead financial institutions of India have to walk a tightrope of nurturing the recovery within the overarching objective of preserving long term stability of the financial system,” Das said.
Moody’s Investors Service Inc. estimates state banks will need $28 billion of capital over the next two years to improve their loss absorbing buffers. The banking regulator predicts that the capital adequacy ratio for lenders could fall to 11.8% next March -- close to the minimum regulatory threshold of 9% -- down from 14.6% in March 2020.
To protect themselves from the fallout of the virus and so they can step up credit once demand returns, most of India’s top private lenders such as Kotak Mahindra Bank and ICICI Bank have raised about $9 billion by tapping equity markets. However, most state banks -- which provide loans to more than two-third of the financial sector -- remain capital constrained and reliant on a fiscally-stretched government that’s unlikely to provide any funding in the current financial year.
Across India, one of the world’s longest and strictest lockdowns has shuttered businesses and left millions jobless. Standard Chartered Plc expects that about 20% of 27.4 trillion rupees ($371 billion) in combined debt of about 420 companies may turn stressed by March 2021, up from 14% a year earlier.
The unwinding of stimulus measures brought in to help banks deal with the fallout of the coronavirus pandemic will be in an orderly manner. Banks should not expect the regulator to continue with further regulatory easing once the pandemic is under control, Das said.
“When we enter post pandemic phase, then there has to be a very calibrated, cautious exit,” he said. “RBI is taking a long term view of things and not just thinking about tomorrow.”
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