Impact of the second wave of Covid on banks less than expected: Das
The impact of the second wave of covid on banks’ balance sheets was much less than previously anticipated, and the capital and liquidity cushions are resilient to withstand future shocks, the Governor of the Bank said. Reserve from India, Shaktikanta Das in the Foreword to Financial Stability. Report released by the central bank on Thursday.
“The impact on the balance sheets and performance of financial institutions in India has been much less than previously projected, although a clearer picture will emerge as the effects of regulatory relief are fully felt. Yet the capital and liquidity cushions are reasonably resilient to withstand future shocks, as the stress tests presented in this report demonstrate, ”he said.
FSR is a semi-annual report, which reflects the collective assessment of the Financial Stability and Development Board (FSDC) subcommittee on risks to financial stability and resilience of the financial system.
That said, RBI noted that banks should prepare for a new wave of stress as bad loans could hit 9.8% of their loan portfolio by year-end, up from 7.5% in FY21. Mint had released the excerpts from the report on Thursday.
Admittedly, this latest projection is lower than the previous NPA projection of 13.5% in September.
Within banking groups, RBI stress tests showed that the gross non-performance rate of public sector banks of 9.54% in March 2021 could reach 12.52% by March 2022. Banks the private sector could see bad debts as high as 5.82% and foreign banks could see bad debts. 4.9% loans by March 2022.
However, lenders are well capitalized to withstand this stress, the central bank said. Banks’ risk-weighted asset ratio could decline slightly to 15.5% by March 2022 as a baseline scenario, down from 15.8% in March this year. In the worst-case scenario, where severe strains translate into bad debts reaching 11.2% of total loans, banks could find capital adequacy ratios to drop to 13.3%. All of these results on capital are above the minimum regulatory requirement of 11.5% which includes 2.5% of the capital conservation buffer. Stress tests assume 9.5% growth in gross domestic product (GDP), average retail sales inflation of 5.1%, and measures for four other macroeconomic data for various scenarios
In the foreword, Das also noted that while the recovery is underway, new risks have emerged on the horizon, including international commodity prices and inflationary pressures, global fallout against a backdrop of high uncertainty and increasing incidence of data breaches and cyber attacks.
As a result, sustained political support accompanied by further strengthening of capital and liquidity reserves by financial entities remains vital, he said.
“While our financial system remains in the spotlight and prepares to step in to meet the resource needs of an economy on its way to a brighter post-pandemic future, the priority is to maintain and preserve financial stability. “, he added.
Das said the financial system can take the lead in creating the conditions for the economy to recover and thrive. For this, banks must ensure more solid capital positions, good governance and the efficiency of financial intermediation so that the financing needs of the productive sectors of the economy are met.
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