Covid-19 2nd wave has dented recovery: RBI

MUMBAI: The second wave of the pandemic has dented recovery, but with cases abating rapidly, economic activity has improved since May-end, RBI Governor Shaktikanta Das has said.
In a foreword to the financial stability report (FSR) released on Thursday, Das said the hit on banks’ balance sheets and performance due to the pandemic has been much less than what was projected earlier.
According to the stress tests conducted by the RBI, the banking sector’s bad loans or gross non-performing assets (GNPAs) may increase from 7.48% in March 2021 to 9.8% by March 2022 under the baseline scenario, and to 11.22% under a severe stress scenario. In January, the RBI had said that GNPAs in September 2021 would be around 13.5% under the baseline scenario and 14.8% under a severe stress situation.
The RBI has cautioned banks on the risks arising out of loans to small businesses and retail. “While banks’ exposures to better rated large borrowers are declining, there are incipient signs of stress in the micro, small and medium enterprises (MSMEs) and retail segments,” the report said.
The central bank has explained the difference between the January projection and the current report, stating that the earlier FSR was based on an estimate of bad loans as there was a standstill order against loans being classified as NPAs. In March 2021, the Supreme Court lifted the bar on loans being classified as NPAs and the actual data became available, enabling the RBI to do stress tests based on the regular methodology.
In the FSR, the RBI has, for the first time, taken pains to point out that the scenarios are not forecasts and are only ‘indicative of the possible economic impairment latent in banks portfolio with implications for capital planning’.
According to Das, the financial system will play a major role in leading the economic recovery. “In a situation in which economic activity has been disrupted by the pandemic, the financial system can take the lead in creating the conditions for the economy to recover and thrive,” he said.
Despite the improved outlook, the RBI called for continuing policy stimulus as supply constraints, rising commodity prices and large swings in global capital flows pose challenges. “Hasty withdrawal of policy stimulus to support growth before sufficient coverage of the vaccination drive can sap macro-financial resilience and have adverse unintended consequences,” the FSR said. It also highlighted cyber attacks and data breaches as those among the emerging risks.
Pointing out that banks have enough capital to meet challenges arising out of the pandemic, the RBI said that the stability indicator for banks with respect to soundness, profitability and liquidity improved in March 2021 as compared to the previous year. Even in a worst-case scenario, banks would still have capital adequacy of 10.7%, the RBI said.
In the report, the central bank highlighted the risks posed by big tech financial firms, which also straddle non-financial lines of businesses with opaque overreaching governance structures. These companies have the potential to become dominant players and can overcome limits to scale by exploiting network effects. The RBI has said that one way to deal with this was to use a blend of entity-based and activity-based regulation.



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