Real bank stress may be hidden by easy liquidity: RBI’s Shaktikanta Das

Real bank stress may be hidden by easy liquidity: RBI's Shaktikanta Das

Mumbai: The extraordinary easy liquidity policies of the Reserve Bank of India (RBI) have helped banks report strong financial parameters but these numbers do not necessarily reflect the true stress in the system due to the pandemic, governor Shaktikanta Das said. For the second time in a row, the governor warned of the divergence between the financial markets and the real economy and raised red flags about ballooning stock and bond values, but said financial stability will be the “overarching goal” of the regulator.

“Congenial liquidity and financing conditions have shored up the financial parameters of banks, but it is recognised that the available accounting numbers obscure a true recognition of stress,” Das said in his foreword to the Financial Stability Report on Monday. “Banks must exploit the congenial financial conditions and the conducive policy environment to plan for capital augmentation and alterations in business models.” In a rare sign of comfort, all five components of the Banking Stability Indicator are showing improvement, but the defaults situation may worsen with gross bad loans likely surging to as much as 14.8% in September this year under extreme stress conditions, from 7.5% in the year earlier, the report said.

The adverse scenarios used in the macro stress tests were stringent conservative assessments under hypothetical adverse economic conditions, so the model outcomes do not amount to forecasts, the report said. The report, which was to have been released last month, was delayed to incorporate the first advance estimates of national income for 2020-21 released on January 7. The governor’s warnings come amid record high stock indices and overnight market interest rates that plunged below the RBI’s desired levels. They came just a day after the central bank moved to restore normalisation of liquidity operations by announcing a 14-day reverse repo auction to drain some liquidity. While policymakers are still attempting to stoke economic revival, record rallies in financial assets are causing discomfort.

“The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, both globally and in India,” said Das. “Stretched valuations of financial assets pose risks to financial stability. Banks and financial intermediaries need to be cognisant of these risks and spillovers in an interconnected financial system.”

As states borrow to meet funding requirements amid a collapse in revenue receipts, the fear of government borrowing crowding out private sector demand has also risen, it said. “The adverse impact on government revenue and the resultant increase in sovereign borrowing in a period when fiscal authorities are also required to provide stimulus to economic growth, is increasing sovereign debt to levels that have intensified concerns relating to sustainability with crowding out fears in respect of the private sector in terms of both volume of financing and costs,” it said.

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