Financial system stable despite weakening economic growth; reviving consumption, investment a major challenge: RBI
The PSBs need to build stronger buffers to absorb any disproportionate operational losses, while private lenders need to focus on corporate governance, the RBI said.
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Lenders are struggling as credit demand has remained subdued due to overall sluggishness in the economy
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The country’s shadow banking sector has been struggling since last year after the collapse of IL&FS, a major infrastructure lender
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Faultlines in over 1,500 urban co-operative banks were exposed after a scam at PMC Bank
Mumbai: India’s financial system remains stable even after economic growth plummeted to a six-year low, the Reserve Bank of India (RBI) said on Friday.
“Reviving the twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge going forward,” the central bank said in its bi-annual Financial Stability Report (FSR) released on 27 December.
Lenders are struggling as credit demand has remained subdued due to overall sluggishness in the economy. Even though the share of bad loans in the banking sector has declined, further improvement by banks is required, added the RBI.
File image of RBI. AFP
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The public sector banks (PSBs) need to build stronger buffers to absorb any disproportionate operational losses, while private lenders need to focus on corporate governance, the RBI said.
The country’s shadow banking sector has been struggling since last year after the collapse of IL&FS, a major infrastructure lender. This has also impacted banks.
“Failure of any non-banking financial companies (NBFCs) or housing finance companies (HFCs) will act as a solvency shock to its lenders,” said the report.
Faultlines in over 1,500 urban co-operative banks were exposed after a scam at Punjab and Maharashtra Co-operative (PMC) Bank. The central bank has taken steps to improve governance at these banks as their performance deteriorated significantly between March and September 2019.
PMC used more than 21,000 fictitious accounts to hide loans it made to one realty company which had led to a loss of at least 43.55 billion Indian rupees ($610 million).
Even now loan-related frauds continue to dominate by constituting 90 percent of all frauds reported in the financial year 2018-19 by value, said the RBI.
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The RBI’s worry is not without reason. In the recent past, two NBFCs have faced a major crisis situation—IL&FS and DHFL—on account of a severe liquidity shortage.