Warning of impending stress in the banking sector following unwinding measures taken to combat the impact of COVID-19, the Reserve Bank of India (RBI) on Tuesday said banks will need to adapt and adjust themselves to meet approaching challenges.
RBI, in its report on “Trend and Progress of Banking in India 2019-20,” said that the central bank took 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, RBI said, banks are raising capital in preparation of the impending stress.
“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 report added.
Improvement in the health of the banking sector in the future hinges around the pace and shape of economic recovery, the RBI report said, adding, “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 troika of policy rate cuts and liquidity infusion; regulatory forbearance; and time-bound resolution with additional provisions was employed to ease immediate concerns emanating from the pandemic as well as aid the economic revival going forward, the central bank added.
RBI said the report is being issued in an environment in which the Indian economy, the central bank, and the banking and financial system are confronting the most testing challenge in more than a 100 years.
On fraud in the banking sector, the report said, operational risk has emerged as a major source of risk. Although 98 per cent of frauds in terms of value were related to loans, their occurrence was spread over several previous years.
“There was a concentration of large value frauds, with the top fifty credit-related frauds accounting for 76 per cent of the total amount reported as fraud during 2019-20,” RBI said.