RBI Guv asks banks to conduct Covid-19 stress test and take steps but continue lending

The public sector banks’ bad loan ratio may worsen with coronavirus weakening India’s economic growth, RBI Governor Shaktikanta Das warned, urging the government to have a recapitalization plan ready for lenders and asking the lenders to go for a Covid-19 stress test to gauge their vulnerability and take steps to ensure continued lending to economy at the time of the worst crisis in 100 years.

An RBI report immediately before the onset of Covid-19 had warned that the gross non-performing asset ratio of banks may increase to 9.9 per cent by September 2020 from 9.3 per cent in March 2019. The NPA to loans ratio is used as a measure of the overall quality of the bank's loan book.

“While the multipronged approach adopted by the RBI has provided a cushion from the immediate impact of the pandemic on banks, the medium-term outlook is uncertain and depends on the Covid-19 curve… Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system,” the Governor said Saturday addressing a banking conclave.

The liquidity measures announced by the RBI since the onset of Covid-19 total Rs 9.57 lakh crore, which is equivalent to about 4.7 per cent of GDP.

Das said while the RBI was trying to ensure that the rates were kept low, keeping in mind the inflation trajectory, a recapitalisation plan for all lenders – public and private sector – had now become necessary.

In the past five years between 2015-20, the government had infused Rs 3.08 lakh crore in public sector banks. But the Union Budget for 2020-21 has not made any provision for recapitalization of banks this year. In case of any recapitalization, the government will have to raise fresh resources.

The governor, however, said that Indian economy had started showing signs of normalcy with ease in lockdown restrictions across the country and expressed the hope that financial sector should return to normal functioning without relying on regulatory relaxation as the new norm.

He said post containment of Covid-19, a very careful trajectory has to be followed in orderly unwinding of countercyclical regulatory measures.