Banks need to be watchful of the credit behaviour of the restructured advances and possibility of increased slippages arising from sectors that were relatively more exposed to the Covid-19 pandemic, cautioned the Reserve Bank of India (RBI).
With the unwinding of support measures, some of the restructured accounts might face solvency concerns, with the impact on banks’ balance sheets becoming clearer in the upcoming quarters, per the central bank’s latest annual report.
The report underscored that the prudence warrants need proactive recognition of any non-viable accounts to activate timely resolution.
“Going forward, as the economy recovers and credit demand rises, banks will need to focus on supporting credit growth while being vigilant of the evolving risks.
“Care needs to be taken to ensure that fresh slippages are arrested, and banks’ balance sheets are strengthened to avoid future build-up of stress,” the report said.
RBI noted that the setting up of the National Asset Reconstruction Company Ltd. (NARCL) is a step forward for resolution of large value legacy stressed assets, and is likely to serve as a time-efficient mechanism for reviving investor interest in primary and secondary markets for stressed assets.
“Going forward, continued commitment, professionalism and transparency in operation will help in making the exercise cost- and time-effective,” the report said.
The central bank observed that the setting up of the National Bank for Financing Infrastructure and Development (NABFID) is expected to shift the burden of long-term financing away from the banks.
The NABFID can also play an active role in the development of bond and derivatives markets that are necessary for infrastructure financing, it added.
NBFCs and UCBs
RBi cautioned that the NBFCs (non-banking finance companies) and urban cooperative banks (UCBs) will have to be mindful of frailties, wherever they exist, in their balance sheets and ensure a robust asset-liability management, apart from improving the quality of their credit portfolios.
“Considering the significant share of funding absorbed by NBFCs at the system level, continued attention to their financial health is warranted from the viewpoint of financial stability.
“In order to further strengthen the regulatory and supervisory framework, several measures are expected to be put in place for banks and NBFCs during 2022-23,” RBI said.
The central bank observed that the balance sheet of non-banking financial companies (NBFCs) expanded in 2021-22 (up to December 2021) but asset quality in the sector deteriorated. Nevertheless, capital cushions showed an improvement.