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Early assessment of banking sector health encouraging: RBI deputy guv

"The asset quality of banks has improved and the gross NPAs and net NPAs of the banks have improved from the pre-pandemic levels," Rao said

RBI
Photo: Bloomberg
Subrata Panda Mumbai
4 min read Last Updated : Jun 16 2022 | 3:11 PM IST
While the banking industry has remained relatively unscathed from the ill-effects of the Covid-19 pandemic, with asset quality improving from the pre-pandemic levels, the job is essentially half done because it is important to ensure that the financial system escapes unscathed as we exit from the pandemic-driven regulatory forbearance, M Rajeshwar Rao, deputy governor, Reserve Bank of India (RBI) said in a speech on Thursday.

“While we have attempted to combat the impact of pandemic on the financial system, the task is only half done. We have to ensure that the financial system escapes unscathed as we exit from the pandemic-driven regulatory forbearance,” Rao said at an event.

The preliminary assessment of the health of the banking sector is encouraging, Rao said.  

The gross and net non-performing assets (NPAs) have fallen sharply to 5.97 per cent and 1.7 per cent, respectively, at the end of March 2022. Gross and Net NPAs at the end of September 2019 was 9.23 per cent and 3.66 per cent, respectively. Gross NPAs of scheduled commercial  banks were at 7.3 per cent in March 2021 and 6.9 per cent in September 2021.

Initially, the restructured portfolio of banks as a percentage of the total advances had expanded post 2020 because of various regulatory measures of the central bank. However, the situation seems to be gradually stabilising.

“The asset quality of banks has improved and the gross NPAs and net NPAs of the banks have improved from the pre-pandemic levels. The fresh slippages have broadly been brought under control. Banks have also enhanced their provisions including provisions for restructured accounts”, Rao said.

Not only has there been an improvement in the asset quality of the banking system, but banks have also shored up their capital base to deal with any untoward situation that may arise going forward. They are also well placed to support the economy with rise in credit demand.

“Today, most of the banks have comfortable capital positions which would position them well to support economic recovery. These data points do give us a degree of comfort to us at this juncture. However, we may also have to wait a bit longer to see how the impacts completely play out”, Rao said.

“We expect banks and other financial institutions to proactively undertake stress testing of their loan books subjecting them to various levels of stress, including extreme scenarios to estimate the loss absorption limits wherever available at their disposal and take measures to augment the same wherever necessary”, Rao said.

While exuding confidence at the improvement in banking system’s asset quality, he also cautioned that industry has to exhibit prudence and has to ascertain whether the current levels of asset quality being exhibited are on account of improvement in fundamentals of business on account of deleveraging and efficiency gains or on account of support extended by authorities through the measures.

The pandemic saw the financial sector enjoying favorable momentum with increase in liquidity, flow of credit and normal spending on relief programs. It is getting increasingly debated in the global fora as to whether the pandemic-induced measures have led to build-up of leverage and debt overhang in the non-financial sector, Rao said.

The RBI will issue a discussion paper on the introduction of a framework on expected credit loss for banks. Currently, banks in India follow the incurred loss approach for loan loss provisions while the bigger non-banking financial companies are following the more forward looking expected credit loss approach for estimating credit losses.

“The idea is to formulate principle based guidelines supplemented by the regulatory backstops, wherever necessary. The discussion paper would seek to solicit comments from all stakeholders including the business community on the proposed approach, and the final contours or the transition will take into account the feedback received”, Rao said.
 

Topics :CoronavirusReserve Bank of IndiaIndian banking systemNon-performing assetsBanking sectorIndian banking sectorRBI GovernorRBI Financial Stability Report

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