Online Courses (English)
This just in:

State PCS

Daily Updates

Indian Economy

Warning of Higher NPAs

  • 14 Jul 2020
  • 3 min read

Why in News

Recently, the Reserve Bank of India (RBI) Governor has warned that the economic impact of the Covid-19 pandemic would lead to higher Non-performing Assets and capital erosion of banks.

Key Points

  • Reasons:
    • Just in a span of decade, Indian economy has been hit by the global financial crisis of 2008-09 and the Covid-19 pandemic in 2020.
    • The current crisis may leave a longer impact on Indian economy, which is predicted to contract in the Financial Year (FY) 2020-21 for the first time in the past four decades.
    • Uncertainty about:
      • Full restoration of supply chains.
      • Normalisation of demand conditions.
      • Long term impact of the pandemic on India’s potential growth.
  • Issues Involved:
    • Banks have poor asset quality, lack of profitability, loss of capital, excessive risk exposure, poor conduct, and liquidity concerns.
    • There is also a lack of a mechanism to address bank failures.
    • Stress on Non-banking Finance Companies (NBFCs) and mutual funds are emerging as crucial stress points in the financial system.
  • Suggestions:
    • The RBI Governor has advised all financial intermediaries to assess the impact of Covid-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the FY 2020-21 and to work out possible mitigating measures.
      • The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability.
    • Financial intermediaries should make risk management in tune with the emerging contingencies.
      • The risk management includes, building buffers and raising capital, which will strengthen the internal defences of banks against the risks posed by Covid-19 also ensure credit flow.
    • Recapitalisation plan for Public Sector Banks (PSBs) and private banks since the minimum capital requirements of banks may no longer be sufficient enough to absorb the losses.
      • The minimum capital requirements of banks are calibrated based on historical loss events.

Source: TH

SMS Alerts
 

Please login or register to view note list

close

Please login or register to list article as bookmarked

close
 

Please login or register to make your note

close

Please login or register to list article as progressed

close

Please login or register to list article as bookmarked

close