Financial system sound, lenders should not be extremely risk averse: Shaktikanta Das

Shaktikanta Das said the top priority right now for banks and financial intermediaries should be for augmenting capital levels and improve resilience.

The country’s financial system is sound but lenders should desist from extreme risk aversion during COVID-19 pandemic and beyond, Reserve Bank Governor Shaktikanta Das said on Friday.

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In his foreword to the bi-annual Financial Stability Report (FSR), Mr. Das said the top priority right now for banks and financial intermediaries should be for augmenting capital levels and improve resilience.

“In the evolving milieu, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” Mr. Das said.

The financial system in India remains sound; nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority, he added.

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Banks’ gross NPA may rise to 12.5% by March 2021: RBI FSR

Gross non-performing assets of all banks may jump to 12.5% by the end of this fiscal under the baseline scenario, from 8.5% in March 2020, according to the Financial Stability Report (FSR) released by the Reserve Bank.

Under the ‘very severely stressed scenario’, gross NPA of banks may increase to 14.7 per cent by March 2021, the report said.

The stress tests indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario.

Also read: NPAs may witness unprecedented increase in 6 months: Raghuram Rajan

If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under the very severely stressed scenario, the report showed.

The resilience of Indian banking in the face of macroeconomic shocks was tested through macrostress tests which attempt to assess the impact of cumulative shocks on banks balance sheet and generate projections of GNPA ratios and capital to risk-weighted assets ratio (CRARs) over a one year horizon under a baseline and three adverse – medium, severe and very severe — scenarios, it said.

The baseline scenario is derived from the forecasted values of macroeconomic variables such as GDP growth, combined gross fiscal deficit-to-GDP ratio and CPI inflation among others, the report said.

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