Regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments, deferment of interest payments and restructuring may have implications for the financial health of banks, unless they are closely monitored and judiciously used, the RBI said in its annual report today.

“Although gross and net non-performing asset ratios had come down in March 2020 along with receding slippage ratios, the economic fallout of the pandemic is likely to test this resilience, especially since the regulatory accommodations announced in the wake of the outbreak have masked the consequent build-up of stress,” said the RBI in its 2019-20 annual report today.

Beginning March, the RBI had announced several measures to help the COVID-19-hit economy. This include a six months moratorium on loans and a one-time loan restructuring of loans impacted by COVID-19. These measures have averted a big spike in NPAs (non performing assets) for now.

The RBI, citing the macro stress tests reported in the July 2020 Financial Stability Report, said the NPAs may surge 1.5 times above their March 2020 levels under the baseline scenario and by 1.7 times in a very severely stressed scenario. The system level CRAR can drop to 13.3 per cent in March 2021 from its March 2020 level under the baseline scenario and to 11.8 per cent under the very severe stress scenario, the RBI said.

Bank recapitalisation key

In the backdrop of likely asset quality pressures on Indian banks, recapitalisation of public sector banks is key, the RBI said.

“Recapitalisation plan for public and private sector banks assumes

critical importance. The minimum capital requirements, which are calibrated on the basis of historical loss events, may no longer suffice to absorb post-pandemic losses,” the RBI said.

Recently, the Reserve Bank has already advised banks and NBFCs to carry out COVID-19 stress tests and take necessary remedial measures proactively.

“The ability to raise capital as well as build resilience to ensure financial stability in anticipation of more frequent, varied and bigger risk events than in the past shall be contingent on the governance standards in banks, particularly on strength of risk governance framework,” the RBI said.RBI governor, Shaktikanta Das had recently asked banks to prepare for the Covid shock by enhancing their capital strength. A series of banks had recently raised capital from the market to guard against the bad loan shock.