The Reserve Bank of India (RBI) recently released its annual report for the fiscal year 2019-2020. The report covers various aspects of the Indian banking sector, ranging from the effects of Covid-19 pandemic to the overall financial health of banks. This article discusses the main points highlighted in this report.
Financial Health of Banks
The financial health of banks has been significantly impacted due to the Covid-19 pandemic. In an effort to buffer this impact, RBI implemented regulatory initiatives like moratoriums on loan instalments, deferment of interest payments, and restructuring of loans. These measures have successfully prevented a significant increase in Non-Performing Assets (NPAs) till now. However, if these measures are not judiciously used and closely monitored, they might have long-term implications for the financial health of banks. RBI’s Financial Stability Report (July 2020) had warned about a possible rise in NPAs from 8.5% in March 2020 to 12.5% by March 2021.
Risk Aversion by Banks
Indian banks, in recent times, have shown high risk aversion which is obstructing the credit growth to productive sectors. This risk aversion has surfaced due to banks being wary of new loans potentially turning bad in the future. Despite RBI’s efforts to infuse liquidity into the banking system, there has been a significant slowdown in bank credit growth in 2020. Since March 2020, RBI has infused around Rs. 8-9 lakh crore through various schemes and has also cut the key lending rate by a total of 115 basis points.
Bank Fraud
The incidents of fraud reported by banks involving Rs.1,00,000 and above have more than doubled in FY 2019-20, with an increase of 28% in volume. The majority of these frauds are concentrated in the loan portfolios of banks, both in quantity and value. Public sector banks accounted for the majority (80%) of these frauds. Several reasons contribute to delays in fraud detection, including weak implementation of Early Warning Signals (EWS) by banks and lack of decision making in joint lenders’ meetings.
Slow Economic Recovery
The economic contraction triggered by the pandemic will take a prolonged time to regain its pre-Covid momentum, primarily due to severe damage to consumer consumption. Discretionary spending, especially urban consumption demand, has suffered a significant loss. However, rural demand has fared relatively better. As per the report, the pandemic has also exposed new kinds of inequalities. For instance, white-collar employees had the privilege to work from home, whereas essential workers had to work on-site with potential exposure to the virus.
Inflation
The report suggests that headline inflation might remain elevated in the second quarter of 2020-21. However, it may moderate during the second half of the year. The retail inflation stood at 6.93% in July, which is above the upper tolerance limit of 6%.
Suggestions Made by RBI
RBI has proposed targeted public investment funded by asset monetisation and privatisation of major ports as a potential way to revive the economy. The bank has also suggested creating Goods and Services Tax (GST) Council type apex authorities for land, labour, and power to drive structural reforms and facilitate quicker implementation of infra projects. The recapitalisation of public sector banks is another significant suggestion made by the RBI, given that the minimum capital requirements may no longer suffice to absorb post-pandemic losses.
