RBI's Shaktikanta Das hints on higher NPA and capital erosion; Banks, NBFC stocks in a bloodbath

Das was speaking at the 7th SBI Banking & Economics Conclave organised by the State Bank of India on Saturday,

Jul 13, 2020 02:07 IST India Infoline News Service

Monday’s trading session turned into a bloodbath for banking and NBFC stocks after the Reserve Bank of India (RBI) hinted for higher bad loans and capital downerosions in the sectors. Das emphasized on recapitalization for state-owned and private banks, while also highlighting various issues in NBFC.

At around 2.16 pm, the S&P BSE Bankex was trading at 24,990.72 down by 357.17 points or 1.41%. The index has also touched an intraday low of 24,886.45.

On the index, all stocks were trading in red with City Union Bank at Rs127.90 per piece, down by 3.25%, followed by HDFC Bank at Rs1,078.60 per piece, down 2.4%, Federal Bank at Rs 53.15 per piece, lower by 1.94%, ICICI Bank at Rs 353.90 per piece, down 1.79% and SBI at Rs 192.90 per piece, lower by 1.41%.

Other stocks like RBL Bank, Axis Bank, Bandhan Bank, Kotak Bank and IndusInd Bank tumbled in the range of 0.21-1.12% on BSE Bankex.

Meanwhile, the Nifty Bank was performing at 22,059.30 lower by 1.51%, while Nifty Fin Service was down by 1.70% trading at 10,903.05.

Das said, “Going forward, there are certain stress points in the financial system, which would require constant regulatory and policy attention to mitigate the risks. The economic impact of the pandemic - due to lock-down and anticipated post-lock-down compression in economic growth - may result in higher non-performing assets and capital erosion of banks”.

Das was speaking at the 7th SBI Banking & Economics Conclave organised by the State Bank of India on Saturday,

He added, “A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary. While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring. Mutual funds have emerged as major investors in market instruments issued by NBFCs, which is why the development of an adverse feedback loop and the associated systemic risk warrants timely and targeted policy interventions. Increasing share of bank lending to NBFCs and the continuing crunch in market-based financing faced by the NBFCs and Housing Finance Companies (HFCs) also need to be watched carefully”.

“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 probability distribution of risk events has much fatter tails than we think. Shocks to the financial system dubbed as ‘once in a lifetime events’ seem to be more frequent than even ‘once in a decade’,” said Das.

Thereby, 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 added, “Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability. Hence, it is imperative that the approach to risk management in banks should be in tune with the realisation of more frequent, varied and bigger risk events than in the past. Banks have to remember the old saying that care and diligence bring luck”.

He also explains saying, notwithstanding the numerous steps already taken, there is always room for improvement to address several issues that may emerge in the medium to long-term. These issues are as common to NBFCs and other financial intermediaries as they are to banks. The supervisory approach of the Reserve Bank is to further strengthen its focus on developing financial institutions’ ability to identify, measure, and mitigate the risks. The new supervisory approach will be two-pronged - first, strengthening the internal defenses of the supervised entities; and second, greater focus on identifying the early warning signals and initiate corrective action.

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