Both the Centre and the regulators have stepped up focus on “avoiding a prolonged period of dislocation in financial markets”, the council added.
The Financial Stability and Development Council (FSDC), headed by finance minister Nirmala Sitharaman, on Thursday acknowledged that the COVID-19 pandemic “poses a serious threat to the stability of the global financial system”, and pledged further appropriate measures to bolster the liquidity and capital base of domestic financial institutions.
“While decisive monetary and fiscal policy actions aimed at containing the fallout from the pandemic have stabilised the investor sentiment in the short-run, there is a need to keep a continuous vigil by government and all regulators on the financial conditions that could expose financial vulnerabilities in the medium and long-term,” the finance ministry said in a statement after the 22nd meeting of the FSDC, held through video conference, on Thursday.
The crisis is unprecedented and its ultimate impact and the timing of a recovery are uncertain at the moment, the Council noted.
The government and the central bank have announced various fiscal and monetary measures (under the Rs 21-lakh-crore relief package) “to pre-emptively limit the economic damage and would continue to address the liquidity and capital requirements of the financial institutions”, according to the statement. Both the Centre and the regulators have stepped up focus on “avoiding a prolonged period of dislocation in financial markets”, it added.
Having extended Rs 70,000 crore to state-run banks (including IDBI Bank) in FY20 and Rs 3.1 lakh crore in the past five years, the government had refrained from providing more capital in the Budget for FY21. However, its fiscal calculations have gone haywire due to the pandemic. The latest Rs 21-lakh-crore package, however, contains mostly liquidity-related measures.
The government has already stepped up the focus on enhancing loan flow to critical sectors of the economy to help a quick recovery. Under the relief package, it has already announced up to Rs 3-lakh-crore collateral-free, extra loan for MSMEs with full official guarantee, Rs 75,000-crore liquidity facilities for shadow lenders and a Rs 2-lakh-crore loan facility for farmers who don’t have Kisan credit card, among others.
But lenders are also staring at massive losses, especially in the first half of FY21, due to the Covid-induced lockdown, which is set to erode their capital position substantially. So infusion will be critical, especially in the September and December quarters, if the pace of the credit flow is to be maintained to help the economic recovery.
The RBI has already forecast a contraction in FY21, while some analysts have warned of GDP shrinking by up to 6.8%, thanks to the pandemic-induced lockdown.
Apart from the finance minister, minister of state for finance Anurag Thakur and top officials of the finance and corporate affairs ministries, financial-sector regulators — RBI governor Shaktikanta Das, Sebi chairman Ajay Tyagi, Irdai chief Subhash Chandra Khuntia, IBBI chairman MS Sahoo and PFRDA chairman Supratim Bandyopadhyay —were present in the meeting.