Financial institutions

Banks and financial institutions should proactively undertake stress testing of lending books: RBI Deputy Governor Rao

MUMBAI: Despite improving asset quality, financial institutionsincluding banks, should proactively undertake stress testing of their loan portfolios to examine loss absorption limits and take steps to improve them, if necessary, RBI Deputy Governor M Rajeshwar Rao said on Thursday.
Gross non-performing assets (GNPA) and net NPA of banks improved to 5.97% and 1.7% as of March 31, 2022, from 9.23% and 3.66% in September 2019, respectively, a- he declared.
During the pandemic, the financial sector has seen increased liquidity, credit flows and spending on relief programs, the deputy governor said.
He said that in global forums there is increasing debate over whether the pandemic-induced measures have led to debt accumulation and over-indebtedness in the non-financial sector.
“Banks should exercise caution in determining whether the current levels of asset quality on display are due to improving business fundamentals through deleveraging and efficiency gains or support from authorities through policy measures. .
“We expect banks and other financial institutions to proactively undertake stress testing of their loan portfolios by subjecting them to varying levels of stress, including extreme scenarios, to estimate the loss absorption limits there. where they are available and take steps to increase them if necessary,” Rao said.
He was speaking during a Banking and Finance Conference, organized by IMC Chamber of Commerce and Industry.
While the central bank has tried to tackle the impact of the pandemic on the financial system, (but) the task is only half done, he said, adding: “We need to make sure that the financial system will emerge unscathed from the pandemic. regulatory forbearances,” he said.
According to Rao, the preliminary assessment of the health of the banking sector is encouraging.
The banks’ restructured portfolio as a percentage of total advances, which increased significantly after 2020, due to the restructuring of accounts undertaken in preparation for the resolution framework announced by RBI, appeared to be gradually stabilizing, he said.
The new slippages have been largely brought under control and lenders have also beefed up provisions, including provisions for restructured accounts, Rao said.
The Provision Coverage Ratio (PCR) of banks improved from 77% in September 2019 to 86.8% in March 2022.
“Today, most banks have comfortable capital positions that would position them well to support the economic recovery. These data points give us comfort at this point,” he said.
The Deputy Governor said RBI will continue to roll out measures to improve the resilience of the financial sector.
He said banks across the country are following the incurred loss approach for loan loss provisions, and RBI now plans to publish a discussion paper on introducing an expected credit loss model framework soon. .
“To achieve global regulatory convergence, we have proposed to publish a discussion paper on the introduction of an expected credit loss framework for banks. The idea is to formulate principles-based guidelines complemented by regulatory safety nets, if necessary,” Rao said. .
He said the discussion paper would seek to solicit feedback from all stakeholders, including the business community, on the proposed approach, and that the final outlines of the transition will take into account comments received.
An allowance for loan losses is an expense that is set aside for defaulted loans. Banks have set aside a portion of expected loan repayments from all loans in their portfolio to cover losses in whole or in part. In the event of a loss, instead of taking a loss in its cash flow, the bank can use loan loss reserves to cover the loss.
Rao added that the RBI is also at an advanced stage of finalizing the revised standards for the classification, valuation and operations of commercial banks’ investment portfolio.

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