Indian Economy
Warning of Higher NPAs
- 14 Jul 2020
- 3 min read
Why in News
Recently, the Reserve Bank of India (RBI) Governor has warned that the economic impact of the Covid-19 pandemic would lead to higher Non-performing Assets and capital erosion of banks.
Key Points
- Reasons:
- Just in a span of decade, Indian economy has been hit by the global financial crisis of 2008-09 and the Covid-19 pandemic in 2020.
- The current crisis may leave a longer impact on Indian economy, which is predicted to contract in the Financial Year (FY) 2020-21 for the first time in the past four decades.
- Uncertainty about:
- Full restoration of supply chains.
- Normalisation of demand conditions.
- Long term impact of the pandemic on India’s potential growth.
- Issues Involved:
- Banks have poor asset quality, lack of profitability, loss of capital, excessive risk exposure, poor conduct, and liquidity concerns.
- There is also a lack of a mechanism to address bank failures.
- Stress on Non-banking Finance Companies (NBFCs) and mutual funds are emerging as crucial stress points in the financial system.
- Suggestions:
- The RBI Governor has advised all financial intermediaries to assess the impact of Covid-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the FY 2020-21 and to work out possible mitigating measures.
- The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability.
- Financial intermediaries should make risk management in tune with the emerging contingencies.
- The risk management includes, building buffers and raising capital, which will strengthen the internal defences of banks against the risks posed by Covid-19 also ensure credit flow.
- Recapitalisation plan for Public Sector Banks (PSBs) and private banks since the minimum capital requirements of banks may no longer be sufficient enough to absorb the losses.
- The minimum capital requirements of banks are calibrated based on historical loss events.
- The RBI Governor has advised all financial intermediaries to assess the impact of Covid-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the FY 2020-21 and to work out possible mitigating measures.
