Indian banks need to bolster their capital positions, build adequate buffers and strengthen corporate governance to deal with emerging risks as the economy recovers from the impact of the COVID-19 pandemic, a report by the Reserve Bank said.
Sounding a note of caution, the RBI in its annual report on ‘Trend and Progress of Banking in India 2020-21’ said that the disruption in economic activity in the wake of the pandemic resulted in corporate and household sector stress and weakening of demand conditions.
“Through concerted efforts, the Reserve Bank and the Government managed to contain the risks to financial stability. As the economy revives, renewed focus may need to be placed on building up of adequate buffers and being vigilant of the evolving risks,” the RBI said.
The report said during 2020-21, scheduled commercial banks (SCBs) reported a discernible improvement in their asset quality, capital buffers and profitability, notwithstanding the disruptions of the pandemic.
While credit offtake remained subdued, elevated deposit growth on the liabilities side was matched by growth in investments on the assets side. Nonetheless, incipient stress remains in the form of higher restructured advances.
“Banks would need to bolster their capital positions to absorb potential stress as well as to augment credit flow when policy support is phased out,” it said.
It further said most of the regulatory accommodations announced by the RBI, including restrictions on dividend payouts by banks, deferment of implementation of the last tranche of capital conservation buffer (CCB) have already expired.
As the pandemic situation is dynamic, the regulatory response will be calibrated in response to the evolving situation, the central bank said.
The report further said with rapid technological advancements in the digital payments landscape and emergence of new entrants across the FinTech ecosystem, banks would also be required to prioritise upgrading their IT infrastructure and improving customer services, together with strengthening their cybersecurity.
“Banks would need to strengthen their corporate governance practices and risk management strategies to build resilience in an increasingly dynamic and uncertain economic environment,” the RBI said in its report.
Although credit offtake by banks remained subdued in an environment of risk aversion and muted demand conditions during 2020-21, a pick up has started in the second quarter of 2021-22, with the economy emerging out of the shadows of the second wave of COVID-19.
“Going forward, revival in bank balance sheets hinges around overall economic growth which is contingent on progress on the pandemic front,” it said.
During 2020-21, the consolidated balance sheet of scheduled commercial banks (SCBs) expanded in size, notwithstanding the pandemic and the resultant contraction in economic activity.
In 2021-22 so far, nascent signs of recovery are visible in credit growth. Deposits grew by 10.1 per cent at end-September 2021 as compared with 11 per cent a year ago, the report said.
“SCBs’ gross non-performing assets (GNPA) ratio declined from 8.2 per cent at end-March 2020 to 7.3 per cent at end-March 2021 and further to 6.9 per cent at end-September 2021,” the report said.
On recapitalisation requirements after COVID-19, the RBI said that based on the capital position as on September 30, 2021, all public and private sector banks maintained the capital conservation buffer (CCB) well over 2.5 per cent.
“Going forward, 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.
The apex bank also stressed that concerted strategies for timely capital infusion need to be carried forward by the banks.