Necessary to recapitalize PSBs-PVBs
Banks and financial intermediaries have to be ever vigilant and substantially upgrade their capabilities with respect to governance, assurance functions and risk culture.
Giving this advise, the Reserve Bank of India (RBI) Governor, Shaktikanta Das, pointed out that there are certain stress points in the financial system which would require constant regulatory and policy attention to mitigate the risks.
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, Das told delegates at the 7th SBI Banking & Economics Conclave.
“The new supervisory approach will be two-pronged – first, strengthening the internal defenses of the supervised entities; and second, a greater focus on identifying the early warning signals and initiate corrective action.”
“We are placing special emphasis on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions), as these have been the areas of heightened supervisory concern.
“Supervised entities generally tend to focus more on business aspects even to the detriment of governance aspects and assurance functions.
“There was also an apparent disconnect between their articulated business strategy and actual business operations.
“The thrust of the approach, therefore is, to improve the risk, compliance, and governance culture amongst the financial institutions,” he stressed.
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, he cautioned.
“A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary,” said Das said at the State Bank of India’ conclave on 11 July 2020.
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,” he cautioned.
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, he pointed out.
“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 the Governor.
Accordingly, 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.
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, Das went on.
“Banks have to remember the old saying that care and diligence bring luck. To paraphrase Oscar Wilde, being caught unprepared in the face of a shock may be regarded as a misfortune, but to be caught unawares more than once may be a sign of carelessness,” he stressed.
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, he said.
These issues are as common to NBFCs and other financial intermediaries as they are to banks. #banks #financial #loans #debts #RBI /fiinews.com
