Banks’ asset quality will need to be closely monitored in coming quarters, with preparedness for higher provisioning in view of lifting of the interim stay on asset classification standstill by the Supreme Court on March 2021, according to the Reserve Bank of India (RBI).

In its 2020-21 annual report, RBI observed that the waiving of interest on interest charged on loans during moratorium period (March 1 to August 31, 2020) may also impinge on lending institutions’ finances.

“They are, however, better positioned than before in managing stress in balance sheets in view of higher capital buffers, improvement in recoveries and a return to profitability,” the report said.

Stress tests indicate that Indian banks have sufficient capital at the aggregate level even in a severe stress scenario, it added.

RBI emphasised that bank-wise as well as system-wide supervisory stress testing provide clues for a forward-looking identification of vulnerable areas.

The central bank assessed that resumption of the insolvency processes under the Insolvency and Bankruptcy Code (IBC), and the introduction of a pre-packaged insolvency mechanism for MSMEs (micro, small and medium enterprises) to provide an easier resolution channel are expected to bring back the focus on meaningful resolution of stressed assets by the lenders, even as necessary regulatory measures are taken to respond to the fallout of resurgent pandemic.

The report said the envisaged bad bank, the regulatory measures aimed at developing market-based mechanisms for credit risk transfer, such as securitisation, transfer of loan exposures and development of secondary loan market may help in reducing the stressed assets on the bank balance sheets.

Related Topics
comment COMMENT NOW