Macro stress tests conducted for ascertaining the credit risk on the loan books of banks’ show that lenders will stay compliant with minimum capital regulatory norms, even in the case of extreme stress in the system, Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday. According to RBI norms, banks must maintain a minimum capital adequacy ratio of at least 9% or above.
The governor said for a bank to be financially resilient, it should have adequate capital buffers and be able to generate earnings even in times of severe macroeconomic shocks. Banks should also have adequate liquidity to meet its obligations in various situations.
“The Reserve Bank has, therefore, started looking at the business models of banks more closely. Aspects or deficiencies in the business model itself can spark a crisis in due course. We have not only prescribed regulatory norms for capital adequacy and liquidity ratios, but even gone beyond to nudge banks to build up capital buffers in good times and times of plenty,” Das said at the global conference on financial resilience.
He said the RBI did this during the pandemic when there was plenty of liquidity, interest rates were low and the full impact of Covid on the financial sector was highly uncertain.
Banks’ asset quality continued its improving trajectory, with average gross non-performing asset ratio falling to 4.41% as on December 31, from 5.8% as on March 31, 2022, and 7.3% as on March 31, 2021, Das said. Banks’ capital adequacy ratio, at 16.1% as of December-end, was also much above the minimum regulatory requirement.
Cyber risks, aggressive growth
Highlighting the fact that banks’ reliance on third parties for outsourcing of services has significantly increased, Das said there is a greater need for ensuring that effective policies and practices are in place to ensure customer protection.
“In the context of the growing exposure of regulated entities (REs) to various risks from dependency on third parties which provide technology and IT-enabled services, the RBI on April 10 issued comprehensive guidelines on IT outsourcing by banks, NBFCs and other regulated entities,” Das said.
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According to him, vulnerabilities for banks and financial entities often arise from inappropriate business models. While the RBI does not interfere with business decision making, REs must demonstrate adequacy of internal controls and loss-absorption capacity to match risks that their business models may generate.
The RBI’s approach, Das said, is to flag deficiencies to the senior management of individual institutions for remedial action. The RBI also remains engaged with external auditors and flags issues that are relevant for their role as the third line of defence.