The Reserve Bank of India Governor Shaktikanta Das today said that the possibility of rising bad loans and increasing vulnerabilities in the financial sector is inevitable, given with the COVID19 outbreak. The key, however, would be how banks and other financial institutions respond to this crisis, Das said.

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“The global financial crisis of 2008-09 and the COVID-19 pandemic have dispelled the notion that tail risks to the financial system will materialise only rarely,” the Governor said in his address at the SBI Conclave.

“Shocks to the financial system dubbed as ‘once in a lifetime events’ seem to be more frequent than even ‘once in a decade’. Accordingly, the minimum capital requirements of banks, which are calibrated based on historical loss events, may no longer be considered sufficient enough to absorb the losses,” Das said.

Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability, Das said. In this context, he said that recapitalisation of public sector banks was “absolutely necessary”. Today, more than ever, banks must be watchful of any emerging vulnerability, Das said.

“While the multipronged approach adopted by the Reserve Bank has provided a cushion from the immediate impact of the pandemic on banks, the medium-term outlook is uncertain and depends on the COVID-19 curve,” he said.

The Governor highlighted that building buffers and raising capital will be crucial not only to ensure credit flow to the economy, but also to build resilience in the financial system.

“We have recently (19th June and 1st July, 2020) advised all banks, non-deposit taking NBFCs (with an asset size of Rs 5,000 crore) and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21. Based on the outcome of such stress testing, banks and non-banking financial companies have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning, among others,” he said.

During his speech, the Governor emphasised on the need to build buffers more than a few times. “Banks have to sharpen risk management practices, and raise capital on an anticipatory basis,” he said.

“Banks have to remember the old saying that care and diligence bring luck. To paraphrase Oscar Wilde, being caught unprepared in the face of a shock may be regarded as a misfortune, but to be caught unawares more than once may be a sign of carelessness,” Shaktikanta Das concluded.