RBI remains committed to future-proofing Indian financial system

Shaktikanta Das, Governor Reserve Bank of India (RBI), stated in a latest speech yesterday that the RBI remains committed to future-proofing the Indian financial system and provide the required support for sustainable growth. Das noted that in the context of the overall impact of the COVID-19 pandemic, the war in Ukraine and the recent banking sector events in the US and Europe on the financial sector, there is now renewed focus on issues of financial resilience and stability. Regulators and Governments across the world are now looking at these aspects with greater intensity. Adequacy of the existing regulations and supervisory systems are under fresh assessment.

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. We did this during the COVID-19 pandemic when there was plenty of liquidity, the interest rates were low and the full impact of the pandemic on the financial sector was still highly uncertain.

The Reserve Bank has also put in place various prudential regulatory frameworks. These include capital adequacy requirements, asset classification and provisioning requirements, dividend distribution framework and liquidity management framework. In addition, the Reserve Bank also periodically deploys macroprudential measures to address system level build-up of risks. As a consequence of the measures taken by both the Reserve Bank and the banks themselves, the Indian banking system has remained resilient and has not been affected adversely by the recent sparks of financial instability seen in some advanced economies. This also comes out clearly in our recent stress test results.

The Gross NPA ratio for the Scheduled Commercial Banks (SCBs) was 4.41 per cent at end December 2022, down from 5.8 per cent as on March 31, 2022 and 7.3 per cent as on March 31, 2021. The CRAR at 16.1 per cent at end December 2022 is also much above the minimum regulatory requirement. Macro stress tests for credit risk indicate that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios, according to the RBI governor.

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