Decoding why a large number of lenders have been rushing to raise capital, Reserve bank of India (RBI) Governor Shaktikanta Das, today said that the central bank asked lenders to chalk out plans and keep adequate capital ready to deal with any shocks that come up owing to the coronavirus pandemic. Shaktikanta Das said that the RBI wrote to banks and other financial institutions in March this year asking them to have plans in place to ensure continuity of business and have mechanisms in place to deal with emerging challenges. “Building buffers and raising capital will be very crucial, not only to ensure credit flow but also to build resilience in the financial system,” the RBI governor said.
The central bank in two separate communications in June and July asked banks to conduct Covid stress tests to analyse the impact of the pandemic on their balance sheets, asset quality, and liquidity. “Based on these tests, banks and NBFCs have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning. The idea is to ensure continued credit availability to different sectors and maintain financial stability,” Das added. The RBI Governor stressed the need for banks to focus on how to deal with the world post coronavirus.
“Rising of non-performing assets and vulnerability is obvious. When there is a natural calamity, naturally, repayment behaviors and capacity of certain borrowers get impacted,” Das said. To deal with it he suggested banks sharpen their risk management skills and raise capital. Das further added that in the post-coronavirus world, compression in economic growth may result in capital erosion and higher NPAs, he said that to deal with the challenges recapitalisation of public sector banks and private sector banks is absolutely necessary. Calling coronavirus the worst health and economic crisis in the last 100 years during peacetime, India’s top-most banker said the pandemic has hit jobs while also denting global supply chains and socio-economic conditions.
A large number of banks have announced plans to raise capital through various means. Recently, ICICI Bank announced that it will raise Rs 15,000 crore from a share sale while Yes Bank decided to sell shares and Tier-2 bonds. On Friday PNB also announced plans to raise Rs 10,000 crore. Other lenders who have either raised or have announced plans to raise include, Kotak Mahindra Bank, SBI, IDFC First Bank, and Axis Bank.
Shaktikanta Das, listed out all that the central bank has done during the last few months and added that risks to the financial system can no longer be thought out to be rare. “The probability disruption of risk events has much fatter tails than we think , shocks to the financial system dubbed as once in a lifetime even seem to be more frequent than once in a decade. Accordingly, the minimum capital requirement of banks may not be considered adequate enough to absorb losses,” he said.