RBI in favour of carefully crafted strategy to deal with challenges in financial sector

Mumbai: The Indian financial sector will need a carefully crafted strategy to deal with the future challenges relating to climate change and technological innovations, in addition to the fallout of the COVID-19 pandemic, the Reserve Bank said on Tuesday.

In its 'Report on Trend and Progress of Banking in India 2020-21', the RBI said the assessment of the systemic impact of climate change on the economy and financial stability is still evolving and so are the responses of central banks and supervisors around the world.

The Reserve Bank is actively engaged in conducting research on areas such as green finance and the impact of climate change on various macroeconomic variables such as inflation and growth.

Globally, as well as in India, the banking and non-banking sectors have weathered the COVID-19 disruptions well, supported by policy measures.

As economic growth picks up and policy measures are rolled back, the pandemic's impact on banks' balance sheets will be clearer.

Climate change and technological innovations pose medium-term challenges to the sector, which will need to be addressed through carefully crafted strategies, the report said.

"In a nutshell, the Indian financial sector is standing at crossroads: while the immediate impact of the fallout of COVID-19 will dominate the short-term, larger challenges relating to climate change and technological innovations will need a carefully crafted strategy," it said.

The Reserve Bank on its part will endeavour to ensure a safe, sound and competitive financial system through its regulatory and supervisory initiatives, it said.

The report also said that Indian banks need to bolster their capital positions, build adequate buffers and strengthen corporate governance to deal with emerging risks as the economy recovers from the impact of the COVID-19 pandemic.

Sounding a note of caution, it said that the disruption in economic activity in the wake of the pandemic resulted in corporate and household sector stress and weakening of demand conditions.

"Through concerted efforts, the Reserve Bank and the Government managed to contain the risks to financial stability. As the economy revives, renewed focus may need to be placed on building up of adequate buffers and being vigilant of the evolving risks," the RBI said.

The report said during 2020-21, scheduled commercial banks (SCBs) reported a discernible improvement in their asset quality, capital buffers and profitability, notwithstanding the disruptions of the pandemic.

While credit offtake remained subdued, elevated deposit growth on the liabilities side was matched by growth in investments on the assets side. Nonetheless, incipient stress remains in the form of higher restructured advances.

"Banks would need to bolster their capital positions to absorb potential stress as well as to augment credit flow when policy support is phased out," it said.

It further said most of the regulatory accommodations announced by the RBI, including restrictions on dividend payouts by banks, deferment of implementation of the last tranche of capital conservation buffer (CCB) have already expired. As the pandemic situation is dynamic, the regulatory response will be calibrated in response to the evolving situation, the central

bank said.