Covid lockdown, compression in economic growth may result in higher NPA: RBI Governor Shaktikanta Das

Das highlighted that liquidity measures announced by the RBI since February this year aggregate to about Rs 9.57 lakh crore.

Reserve Bank of India (RBI) governor Shaktikanta Das on Saturday said there was a ‘necessity’ to have recapitalisation plan for public sector banks (PSBs) and private banks (PVBs) to absorb shocks of Covid-19. In his address at the State Bank of India (SBI) banking & economics conclave, the RBI governor said every
financial institution needed to do a Covid-19 stress test. He said there is a need for  legislative backing to have ‘resolution corporation’ for dealing with revival of stressed financial firms.

The setting up of a ‘resolution corporation’ was earlier proposed by the government through financial resolution and deposit insurance (FRDI) Bill, 2017. However, the bill was later withdrawn due to apprehensions among the public about the ‘bail-in’ clause of the bill. The clause had led to fears that customer deposits could be used to bail out a
failing bank.

The RBI governor also cited example of Yes Bank to emphasise handling of weak institutions by the RBI. “The timely and successful resolution of Yes Bank is an example,” Das said. The government, along with the central bank, had earlier approved a reconstruction scheme for Yes Bank in which State Bank of India (SBI), along with other banks, had infused Rs 10,000 crore as equity capital. SBI had also approved investment of Rs 1,760 crore in Yes Bank’s forthcoming follow-on public offer (FPO).

Das said the regulator is engaged with Punjab & Maharashtra Cooperative Bank (PMC Bank) stakeholders to find a solution. “Reserve Bank is engaged with all stakeholders to find out a workable solution, as losses are very high, eroding deposits by more than 50%,” he said. The regulator had recently doubled the withdrawal limit for the customers of the troubled bank to Rs 1 lakh.

Das highlighted that liquidity measures announced by the RBI since February this year aggregate to about Rs 9.57 lakh crore. “This is equivalent to about 4.7% of 2019-20 nominal GDP,” he said, adding that key parameters in the financial system had improved.

The overall capital adequacy ratio for banks improved 50 basis points (bps) year-on-year (y-o-y) to 14.8% as on March 2020, compared to 14.3% in March 2019. The RBI governor said capital to risk weighted assets ratio (CRAR) of PSBs had improved 80 bps to 13% in March 2020, from 12.2% in March 2019. While the gross NPA ratio has improved 120 bps to 8.3%, net NPA ratio improved 80 bps to 2.9% y-o-y as of March 2020.The provision coverage ratio (PCR) of banks have improved from 60.5% in March 2019 to 65.4% in March 2020, indicating higher resiliency in terms of risk absorption capacity.  The profitability of banks had also improved during the year, Das said.

“The lockdown and anticipated post-lockdown compression in economic growth may result in higher non-performing assets (NPAs) and capital erosion of banks,” he said. However, he mentioned that the key takeaway cannot be that there was a rise in NPA. “The key takeaway is how banks are responding, The key takeaway as I said is the need to focus on governance, focus more on risk management, focus more on raising capital,” he said. Many banks, including SBI, ICICI Bank, Axis Bank and Yes Bank, had announced plans to raise capital for strengthening their balance sheets.

He also highlighted improvement in the key parameters of non-banking financial companies (NBFCs). “The gross and net NPAs of NBFCs stood at 6.4% and 3.2% as on March 31, against 6.1% cent and 3.3% as on March 31, 2019,” he said. The CRAR for NBFCs, however, declined marginally from 20.1% to 19.6% during 2019-20. “While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring,” Das added.

The RBI governor said Indian companies respond better in crisis, citing example of pharma companies during lockdown. He acknowledged that Covid-19 is the worst health and economic crisis in the past 100 years with unprecedented negative consequences for output, jobs and well being.

He also called for unwinding of counter-cyclical regulatory measures after containment of Covid-19. “Post-containment of Covid-19, a very careful trajectory has to be followed in orderly unwinding of counter-cyclical regulatory measures,” he said, adding that the financial sector should return to normal functioning without relying on the regulatory relaxations as the new norm.