E-Paper
Banks need funds to deal with stress: RBI
The funds are needed as a cushion to deal with challenges on account of the ongoing stress experienced by borrowers as well as to meet the economy’s potential credit requirements, the Reserve Bank of India said.
Banks will need to raise more capital to help meet the potential demand for credit and insulate themselves from ongoing stress among borrowers, “especially when monetary and fiscal measures unwind”, the Reserve Bank of India said on Tuesday.
“Based on the capital position as of September 30, all public sector banks (PSBs) and private banks (PVBs) maintained the capital conservation buffer well over 2.5%. However, banks would need a higher capital cushion to deal with challenges on account of the ongoing stress experienced by borrowers as well as to meet the economy’s potential credit requirements,” it said in its Report on Trend and Progress of Banking In India for 2020-21.
It said that concerted strategies for timely capital infusion need to be carried forward by banks. The report echoes State Bank of India (SBI) chairman Dinesh Khara’s recent comment that despite being adequately capitalized, banks would need additional capital of $70 billion ( ₹5.3 trillion) to support India’s ambition to become a $5 trillion economy.
The report said that although credit offtake remained subdued in an environment of risk aversion and muted demand conditions last fiscal year, a pickup has started in the September quarter.
“Revival in bank balance sheets hinges around overall economic growth, which is contingent on progress on the pandemic front. However, banks would need to further bolster their capital positions to absorb potential slippages as well as to sustain the credit flow, especially when monetary and fiscal measures unwind,” it said, adding that although most regulatory relaxation measures have run their course, the full extent of their impact on banks is yet to unfold.
RBI said that during FY21, commercial banks reported a “discernible improvement” in their asset quality, capital buffers and profitability, despite the disruptions of the pandemic. While credit offtake remained subdued, elevated deposit growth was matched by growth in investments.
“Nonetheless, incipient stress remains in form of higher restructured advances. Banks would need to bolster capital positions to absorb potential stress and to augment credit flow when policy support is phased out,” it said.
The consolidated balance sheet of scheduled commercial banks accelerated in 2020-21, notwithstanding the pandemic and contraction in economic activity in first half of the year. Citing supervisory data, the report said while signs of recovery are visible in credit growth, deposit growth has slowed.
