The Reserve Bank of India (RBI) said unprecedented policy support has contained the impairment of balance sheets of banks in India despite the dent in economic activity brought on by waves of the pandemic.
In its latest Financial Stability Report, the central bank observed that banks’ performance and balance sheet quality have turned out to be better than anticipated at the beginning of the pandemic in terms of deposit growth, decline in Gross Non-Performing Assets, capital adequacy and improved profitability.
Stress tests indicate a limited impact of macroeconomic and other shocks on the Indian banking sector, it added.
RBI emphasised that banks were largely shielded from the MTM (market-to-market) losses in their portfolios subject to fair valuation, also aided by the G-SAP (Government Securities Acquisition Programme) of the Reserve Bank.
Downside risks
However, the RBI cautioned that downside risks nevertheless remain, with stress signals emanating from the build-up SMA (special mention account) advances.
Banks must prepare contingency strategies to deal with segment-specific asset quality pressures, especially when regulatory reliefs are eventually rolled back.
Subdued credit growth in a low interest rate scenario could impact net interest income levels adversely, the RBI said.
In his foreword to the FSR, the RBI Governor Shaktikanta Das observed that even as India’s financial system remains on the front foot and prepares to intermediate in meeting the resource needs of an economy on the move towards a brighter post-pandemic future, the priority is to maintain and preserve financial stability.
“In a situation in which economic activity has been disrupted by the pandemic, the financial system can take the lead in creating the conditions for the economy to recover and thrive.
“Stronger capital positions, good governance and efficiency in financial intermediation can be the touchstones of this endeavour so that financing needs of productive sectors of the economy are met while the integrity and soundness of banks and financial institutions are secured on an enduring basis,” said the Governor.
While the recovery is under way, Das cautioned that new risks have emerged on the horizon and these include the still nascent and mending state of the upturn, vulnerable as it is to shocks and future waves of the pandemic; international commodity prices and inflationary pressures; global spillovers amid high uncertainty.
The Governor also flagged the rising incidence of data breaches and cyber-attacks.
Accordingly, sustained policy support accompanied by further fortification of capital and liquidity buffers by financial entities remains vital, he added.