Banks NPAs set to rise, must raise capital to build resilience: RBI Governor

Mumbai (Maharashtra) [India], July 11 : Reserve Bank of India (RBI) Governor Shaktikanta Das said on Saturday that the central bank asked public and private sector banks to chalk out plans and keep adequate capital ready to deal with shocks that may come due to the coronavirus pandemic.
Terming the COVID-19 pandemic as one of the worst health and economic crisis in the last 100 years during peacetime, Das stressed on the need for banks to raise capital and be prepared for what is to come.
The minimum capital requirements of banks which are based on historical loss events may no longer be considered sufficient enough to absorb the losses.
"Meeting the minimum capital requirement is necessary but not a sufficient condition for financial stability," the RBI Governor said as shocks to the financial system dubbed as once in a lifetime events seem to be more frequent than even once in a decade."
Such risk events like the COVID crisis now could be more frequent, varied and bigger risk events than in the past.
"While banks must identify their weaknesses and strengths in how to deal with the current pandemic, such events could be frequent in the coming days and the financial system has to remain prepared. Financial stability is as important as pursuing growth," said Das at State Bank of India's annual Economics and Banking Conclave.
"Building buffers and raising capital will be very crucial, not only to ensure credit flow but also to build resilience in the financial system," he said.
Between 2015-16 and 2019-20, the government had infused a total of Rs 3.08 lakh crore in public sector banks. As a result, the overhang of stressed assets in the banking system declined and capital position improved.
"In the post-coronavirus world, compression in economic growth may result in capital erosion and higher non-performing assets," said Das, adding that the pandemic has hit jobs while denting global supply chains and socio-economic conditions.
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.
"The need of the hour is to restore confidence, preserve financial stability, revive growth and recover stronger," he said.
After the COVID-19 crisis is over, a very careful trajectory has to be followed in the orderly unwinding of counter-cyclical regulatory measures and the financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm, said the RBI Governor.
The central bank is upgrading its supervisory framework, and banks and financial intermediaries must be ever vigilant and substantially upgrade their capabilities with respect to governance, assurance functions and risk culture, he said.