JOIN USThe latest Financial Stability report of the Reserve Bank of India (RBI) has expressed the hope that the worst impact of the pandemic on the economy is over but has struck a note of caution for the near and medium future. The central bank expects growth to recover well before the financial year ends and to pick up pace in the first half of next year. Its focus is on the banking sector, which it thinks has functioned without serious problems through difficult times with the help of a number of timely measures. But the sector is moving into a period of serious challenges. The report has sounded a warning about a financial crisis emanating from banks if some problems are not recognised and acted upon soon.
The regulatory forbearance measures which were taken to help individuals and corporates to cope with the pandemic have masked the distress in the banking system till now. When these measures are withdrawn eventually, banks will have serious problems to deal with. The government’s increased market borrowing will also put more pressure on banks. Though gross non-performing assets (GNPA) showed a decline recently, that is a misleading signal. In the report Governor Shaktikanta Das has warned that banks are likely to see “balance sheet impairments’’ and “capital shortfalls’’ in the coming months. This is despite the relatively sound capital and liquidity buffers that had been built up in the past. The stress tests carried out by the RBI has given some ominous results. In its baseline scenario, bad loans could rise to 13.5% by September 2021, as against 7.5% in September last year. For public sector banks, it could go up to 16%. The situation could be worse if recovery falls short of expectations. Non-banking finance companies have also not performed well, and their asset quality is expected to deteriorate.
The report calls for financial development and risk mitigation efforts for better management of the recovery. The reality of the situation will have to be accepted and addressed in time. What is most important is to avoid the temptation to postpone the remedial measures. Relaxing the NPA norms might be an easy way out but it will only worsen the crisis. The government seems to be considering a proposal to extend the period for declaration of NPAs from 90 days to 120 days of non-servicing of a loan. Rather than pushing the crisis into the future, the government should recognise NPAs in time and recapitalise banks to reduce stress in the system. It is necessary to do this early enough so that banks are in a position to raise credit levels when the economy starts picking up.