Banks require funds to deal with stress, according to the RBI.

Key sentence:

• ON TUESDAY, the RBI said that banks will need to raise more capital to help meet potential credit demand and protect themselves from ongoing borrowers’ stress.
• According to the Report, credit offtake remained subdued last fiscal year due to risk aversion and muted demand conditions.

The RBI said on Tuesday that banks will need to raise more capital to help meet potential credit demand and protect themselves from ongoing borrowers’ stress, “especially as monetary and fiscal measures unwind.”

“Based on their capital positions, all public sector banks (PSBs) and private banks (PVBs) maintained a capital conservation buffer of well over 2.5 percent as of September 30.” 

“However, banks will require a larger capital cushion to deal with challenges arising from borrowers’ ongoing stress as well as to meet the economy’s potential credit requirements,” it said in its Report on the Trend and Progress of Banking in India for 2020-21.

Banks must implement coordinated strategies for timely capital infusion, according to the Report. Despite being adequately capitalized, the Report echoes State Bank of India (SBI) chairman Dinesh Khara’s recent statement that banks will require an additional $70 billion (5.3 trillion) in capital to support India’s ambition to become a $5 trillion economy.

According to the Report, credit offtake remained subdued last fiscal year due to risk aversion and muted demand conditions, but it began to pick up in the September quarter.

“Bank balance sheet recovery is dependent on overall economic growth, which is contingent on pandemic progress. “However, banks will need to strengthen their capital positions to absorb potential slippages as well as maintain credit flow, especially as monetary and fiscal measures wind down,” it said, adding that while most regulatory relaxation measures have run their course, the full extent of their impact on banks has yet to be determined.

According to the RBI, despite the pandemic’s disruptions, commercial banks reported a “discernible improvement” in asset quality, capital buffers, and profitability in FY21. 

While credit demand remained muted, increased deposit growth was matched by increased investment growth.

“However, incipient stress in the form of higher restructured advances persists.” When policy support is phased out, banks will need to bolster capital positions to absorb potential stress and augment credit flow,” it said.

Despite the pandemic and a contraction in economic activity in the first half of the year, the consolidated balance sheet of scheduled commercial banks accelerated in 2020-21. According to the Report, while credit growth shows signs of improvement, deposit growth has slowed.