MUMBAI: The pandemic’s second wave has slowed recovery, but with cases fading quickly, economic activity has increased since May, said RBI Governor Shaktikanta Das. Das said in the prologue to the financial stability report (FSR) released on Thursday that the pandemic’s impact on banks’ balance sheets and performance has been far less than expected.According to the RBI’s stress tests, bad loans, or gross non-performing assets (GNPAs), in the banking sector might rise from 7.48 percent in March 2021 to 9.8 percent by March 2022 in the baseline scenario, and to 11.22 percent in the severe stress scenario. The RBI predicted that GNPAs would be about 13.5 percent in September 2021 under the baseline scenario and 14.8 percent under a severe stress scenario in January.
The gap between the January prognosis and the current report has been clarified by the central bank, which claims that the earlier FSR was based on an estimate of bad loans due to a stop-work order prohibiting loans from being classed as non performing assets. The Supreme Court overturned the ban on loans being categorised as non performing assets (NPAs) in March 2021, allowing the RBI to conduct stress tests using actual data.The financial system, according to Das, will play a key role in driving the economic recovery. “In a case when the pandemic has disrupted economic activity, the financial system may take the lead in establishing the circumstances for the economy to recover and thrive,” he said. Despite the improving prognosis, the RBI has asked for monetary stimulus to be maintained due to supply bottlenecks and rising commodity prices.
“Hasty withdrawal of policy stimulus to boost growth before the immunization drive has achieved sufficient coverage can sap macro-financial resilience and have unforeseen consequences,” according to the FSR. Cyber attacks and data breaches were also identified as emerging threats. The RBI stated that banks have sufficient capital to deal with the challenges posed by the pandemic.
The RBI stated that even in the worst-case scenario, banks will have capital adequacy of 10.7%. Big digital financial corporations, which also span non-financial lines of business with opaque overreaching governance structures, are flagged as a danger in the study by the central bank. These firms have the potential to become dominating players, and they can overcome scale limitations by utilising networking.