Reserve Bank Governor Shaktikanta Das said the Covid-19 pandemic "threatens" to result in balance sheet impairments and capital shortfalls at banks, especially once regulatory reliefs are rolled back.
In his foreword to the bi-annual Financial Stability Report (FSR), Das said easy liquidity and financing conditions have shored up the financial parameters of banks, but made it clear that the "available accounting numbers obscure a true recognition of stress".
He asked banks to exploit the current conditions to augment capital and also alter their business models, which will help in the future.
The RBI had declared a six-month moratorium which ended in August and later announced a one-time loan recast package to help borrowers. Many banks, especially the private sector ones, have already raised safety capital in the early days of the pandemic.
Fiscal authorities are witnessing revenue shortfalls and the resultant expansion in the market borrowing programme of the government has "imposed additional pressures on banks", Das said.
The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, he said, warning that the stretched valuations of financial assets pose risks to financial stability.
Das asked banks and financial intermediaries to be cognisant of these risks and spillovers in an interconnected financial system.
Financial stability is a precondition for supporting the mission of restoring economic growth and livelihoods, Das said, conceding that "we have been scarred by the COVID-19 pandemic".
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