RBI Directs Banks to Conduct Stress Tests, Raise Capital

Source: Regulation Asia Editors, Regulation Asia 2020-07-15

RBI Governor Shaktikanta Das said minimum capital requirements may not be sufficient to absorb losses and maintain financial stability.

RBI (Reserve Bank of India) Governor Shaktikanta Das has directed banks to stress test their balance sheets, asset quality, liquidity, profitability and capital adequacy for the financial year which started in April, amid concerns of higher bad loans and capital erosion.

Based on the outcome of the stress tests, banks and NBFCs have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning, among others – in order to ensure financial stability and continued credit supply to different sectors of the economy.

“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, speaking at the 7th SBI Banking and Economics Conclave. “Meeting the minimum capital requirement is necessary, but not a sufficient condition for financial stability.”

Das also said a recapitalisation plan for state-run and private banks has become “necessary”, given that bad loan ratios at Indian banks are set to deteriorate further in the aftermath of virus-related lockdowns which shuttered businesses and left millions jobless. Yet, a moratorium on loan repayments which extends until end-August has delayed recognition of bank balance sheet stress.

The central bank governor also called for a legislative backing for the establishment of a resolution corporation to deal with the financial sector stress. The idea of a resolution corporation was proposed in the 2017 Financial Resolution and Deposit Insurance Bill, which was later withdrawn.

According to Das, such an agency will ensure that financial firms do not end up being liquidated and increase the value depositors are likely to receive in the resolution of a bank as a going concern than in liquidation.

The RBI has strengthened its off-site surveillance and market intelligence systems to ensure it detects any vulnerabilities that emerge in the financial system early.

RBI

RBI Directs Banks to Conduct Stress Tests, Raise Capital

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