Banks need to strengthen corporate governance and risk management: RBI

The banking sector needs to strengthen corporate governance and risk management practices to deal with uncertainties created by the pandemic, says the RBI. Banks need to build resilience in an increasingly dynamic and uncertain economic environment.

The central bank in its report “Trend and Progress of Banking in India 2020-21” said banks also need to prioritize upgrading their IT infrastructure and improving customer services. It acknowledged that banks have to be ready to compete with fintech companies that have adopted rapid technological advancements in the digital payments ecosystem.

The report says that although credit offtake by banks remained subdued in an environment of risk aversion and muted demand conditions during 2020-21, a pick up has started in the second quarter of 2021-22. The economy is emerging out of the shadows of the second wave of COVID-19 infections. It said revival in bank balance sheets hinges around overall economic growth which is contingent on progress on the pandemic front.

The RBI in its report states that banks need to further bolster their capital positions to absorb potential slippages and sustain the credit flow as well. “The Indian financial sector is standing at cross roads, 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.”

The central bank emphasized that it will endeavor to ensure a safe, sound and competitive financial system through its regulatory and supervisory initiatives. The consolidated balance sheets of scheduled commercial banks, during 2020-21, expanded in size, nothwithstanding the pandemic and the resultant contraction in economic activity.

So far, in 2021-22 nascent signs of recovery are visible in credit growth. The report said deposits grew by 10.1% at end-September 2021, as compared with 11% a year ago. “SCBs’ gross non-performing assets (GNPAs) ratio declined from 8.2% at end-March 2020 to 7.3% at end-March 2021 and further to 6.9% at end-September 2021.”

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In regards to recapitalization requirements after COVID-19, the RBI said based on the capital position as of September 30, 2021, all public and private sector banks maintained the capital conservation buffer (CCB) well over 2.5%. The central bank noted that going forward, banks would need a higher capital cushion to deal with challenges on account of the ongoing stress experienced by borrowers as well as to meet the economy’s potential credit requirements.

It stressed that concerted strategies for timely capital infusion need to be carried forward by the banks. The banking sector needs to build up adequate buffers and remain vigilant to the emerging risks as the economy recovers from the impact of the COVID-19 pandemic.