RBI cautions against a financial instability

Recently, Reserve Bank of India has cautioned than an anticipated doubling of bad loans and rising financial markets in the nation’s debilitated economy impend financial steadiness. As per semi-annual Financial Stability Report published by the Reserve Bank of India, by the end of September, the non-performing asset ratio is predicted to rise to 13.5% from 7.5% a year ago. It states that it would be the worst since 1999, if the number holds through the fiscal year ending March 2022. The Reserve Bank of India observed that in the face of the pandemic, corporate funding has been cushioned by policy measures and the loan moratorium, locally. It held that wit a lag, the stresses would be visible.

It further stated that as corporate and banking sector vulnerabilities are interlinked, this has consequences for the banking sector. Comparable to their international peers, Indian banks have been impacted hugely by the coronavirus pandemic. The pandemic led to an unparalleled economic crash impacting borrowers’ ability to repay debts. The RBI, in response, has taken unparalleled steps to help banks. This includes a loan repayment moratorium that concluded in August. This was followed by a two-year debt restructuring program. To assess the magnitude of the bad-debt issue, the steps have made it tough. As per the report, the RBI assumes banks’ capital ratios will wear down to 14% in September from 15.6% in September 2020.

Most banks raised capital in the past six months. Private banks spearheaded the pack. Next came state-run peers, including the country’s largest bank State Bank of India.


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