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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

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