RBI Governor Shaktikanta Das warns of rising bad debts and uncertain economic outlook

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Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday warned of an increase in bad loans as a direct result of the pandemic and said the medium-term outlook for the economy remains uncertain, as supply chains and demand are not yet fully restored.

A prolonged lockdown, which began on March 25 and continued in phases, albeit with the significant easing of restrictions since early May, has resulted in serious disruptions in industrial production and consumer spending, growth of GDP expected to contract sharply in April-June, pushing India’s economic growth for 2020-21 into a deep recession.

“The economic impact of the pandemic – due to foreclosure and the expected post-foreclosure squeeze of economic growth – may lead to an increase in non-performing assets and erosion of bank capital,” Shaktikanta Das said at the 7th SBI Banking and Economics Conclave.

A plan to recapitalize public sector banks (PSB) and private banks (PVB) has therefore become necessary, he said, adding despite the substantial impact of the pandemic on daily life, the country’s financial system , including all payment systems. and financial markets, operate without hindrance.

“The Indian economy has started to show signs of returning to normal in response to the gradual easing of restrictions. It is, however, still uncertain when the supply chains will be fully restored; how long will it take for demand conditions to normalize; and what kind of lasting effects the pandemic will leave on our potential growth, ”Shaktikanta Das said.

Shaktikanta Das said that the 2008 global financial crisis and the current crisis show that such economic shocks have “bigger tails” than is generally believed, and that the country’s financial system should have more capital reserves. important.

The RBI, Shaktikanta Das said, has been guided by the age-old wisdom that attributes the role of lender of last resort (LOLR) to the central bank.

He cut interest rates by 115 basis points in response to the pandemic, bringing the total cut in policy rates to 250 basis points since February 2019, Shaktikanta Das said.

In addition, the RBI provided cash of Rs 9.57 lakh crore, relaxed some bad loan provisioning standards and authorized loan moratoria for retail clients.

Shaktikanta Das said the targeted and comprehensive reform measures already announced by the government should help support the country’s potential growth.

In addition, particular emphasis is placed on the assessment of the business model, governance and assurance functions (compliance, risk management and internal audit functions), as these are areas of concern for increased surveillance.

“RBI has taken a number of important historic steps to protect the financial system and support the real economy in the current crisis. Although the eventual success of our policy responses is only known after some time, they appear to have worked. so far, ”Shaktikanta Das says.

Perhaps in a very different post-Covid global environment, the reallocation of factors of production within the economy and innovative ways to expand economic activity could lead to rebalancing and the emergence of new drivers of growth, added Shaktikanta Das.

The central bank, Shaktikanta Das said, strives to maintain the balance between preserving financial stability, maintaining the soundness of the banking system and sustaining economic activity.

“After the containment of Covid-19, a very cautious trajectory must be followed in the orderly unfolding of counter-cyclical regulatory measures,” he said.

The financial sector is expected to return to normal operation without relying on regulatory relaxations as the new norm, he added.

Both conventional and unconventional monetary policy and the RBI’s liquidity measures were aimed at restoring market confidence, easing liquidity pressures, easing financial conditions, thawing credit markets and increasing the flow of resources. financial resources to those who need it for productive purposes, Shaktikanta Das said.

“The broader objective was to mitigate risks to the growth outlook while preserving financial stability,” Shaktikanta Das added.

Shaktikanta Das said that despite the substantial impact of the COVID-19 pandemic, the country’s financial system was functioning unhindered.

“RBI continuously assesses the changing trajectory of financial stability risks and improves its own supervisory framework to ensure that financial stability is preserved,” Shaktikanta Das said.

Banks and financial intermediaries must always be vigilant and considerably improve their capacities in terms of governance, insurance functions and risk culture, noted Shaktikanta Das.

The governor also said that banks will need to improve their governance, refine their risk management and raise capital early instead of waiting for a situation to arise.

When a natural disaster occurs, the repayment behavior of some borrowers is affected and this affects the NPA position of banks, Shaktikanta Das said.

“In such a situation, it has become much more important for banks to improve governance, refine risk management skills and raise capital early instead of waiting for a situation to arise. Proactively, there is a need for public and private sector banks to build up adequate capital reserves, ”Shaktikanta Das said.

He said that since the lockdown has hampered the RBI’s on-site supervision to some extent, the central bank is further strengthening its off-site oversight mechanism.

The objective of the off-site surveillance system would be to “feel the distress”, if necessary, and to be able to initiate preventive actions, added Shaktikanta Das.


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