Indian banks and non-banking financial intermediaries need to stress test for new shocks in the face of the recent financial sector turmoil in the US and Europe, according to RBI’s FY23 annual report.

“While Indian banks and non-banking financial intermediaries remain sound and resilient, they need to stress test for these new shocks,” the report said.

Capital buffer and liquidity position, therefore, must be constantly reviewed and strengthened.

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“The resilience of the global financial system will inevitably be tested again as the exit from ultra-easy liquidity resumes and systemic central banks shrink their bloated balance sheets. Financial regulatory policies are also set to tighten in many countries, with lessons from the episodes of banking system stress in March,” the report said..

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The report noted that the recent financial sector turmoil in the US and Europe has necessitated a reassessment of the risks to the financial stability and resilience of financial institutions in the context of monetary policy tightening.

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Accordingly, policy measures, such as the guidelines on the introduction of expected loss-based provisioning are likely to be announced during 2023-24, as per the report.

In addition, the finalisation of the guidelines on securitisation of stressed assets, and a comprehensive review of the prudential framework (including the guidelines on resolution of stress in respect of projects under implementation) are also likely during the year to further strengthen the resolution ecosystem.

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The report said central banks continue to face a challenging trade-off between restoring price stability and addressing growth slowdown in an environment of heightened uncertainty.

“Potential financial risks from high debt levels and the recent banking sector developments in the US and Europe highlight the scope for unanticipated build-up of stress with strong adverse spillovers across the global financial system,” the RBI said.