Banks need to adjust to meet upcoming challenge after unwinding measures to combat COVID-19: RBI

30 Dec 2020 Evaluate

The Reserve Bank of India (RBI), in its report on 'Trend and Progress of Banking in India 2019-20' has cautioned about the imminent stress in the banking sector after unwinding of the measures taken to combat the impact of COVID-19, and it said banks will need to adapt and adjust themselves to meet the upcoming challenges. The report said that the central bank initiated timely measures to relieve stress on bank balance sheets, corporates and households following the outbreak of the coronavirus pandemic.

Observing that banking soundness indicators are obscured under the asset quality standstill, it said banks are raising capital in preparation of the imminent stress. The report noted with the moratorium coming to an end, the deadline for restructuring proposals is fast approaching and with the possible lifting of the asset quality standstill, banks' financials are likely to be impacted in terms of asset quality and future income. Going forward, banks will have to adapt and adjust to the rapidly evolving economic landscape due to these challenges and also the entry of niche players and emerging financial technologies.

The RBI report said improvement in the health of the banking sector henceforth hinges around the pace and shape of economic recovery, and added that the challenge is to rewind various relaxations in a timely manner, reining in loan impairment and adequate capital infusion for a healthy banking sector. The report further said that in the wake of a severe and unprecedented macroeconomic shock caused by the COVID-19 pandemic, the RBI's actions veered towards providing a stimulus to the economy while ensuring financial stability.

The report noted that the moderation in gross non-performing assets (GNPA) ratio, which started after the peak in March 2018, continued through 2019-20 and 2020-21 so far to reach 7.5 per cent by end-September 2020. The improvement was driven by lower slippages which declined to 0.74 per cent in September 2020 and resolution of a few large accounts through the Insolvency and Bankruptcy Code (IBC). Fresh slippages remained highest among the state-owned banks. GNPA ratio of banks declined from 9.1 per cent at end-March 2019 to 8.2 per cent at end-March 2020 and further to 7.5 per cent at end-September 2020. The modest GNPA ratio of 7.5 per cent at end-September 2020 veils the strong undercurrent of slippage.

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