Banks need a higher capital cushion to deal with challenges and stress: RBI

The Reserve Bank of India, in its Report on Trend and Progress of Banking In India for 2020-21, has said banks need concerted strategies for timely capital infusion.

They will need to raise more capital to help meet the potential demand for credit and insulate themselves from ongoing stress among borrowers, “especially when monetary and fiscal measures unwind”.

“Based on the capital position as of 30 September, all public sector banks (PSBs) and private banks (PVBs) maintained the capital conservation buffer well over 2.5%. However, 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,” the bank said in its report on Tuesday.

Banks would need additional capital of $70 billion (Rs 5.3 trillion) to support India’s ambition to become a $5 trillion economy, SBI chairman Dinesh Khara recently said.

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According to the RBI report, although credit offtake remained subdued in an environment of risk aversion and muted demand conditions last fiscal year, a pickup has started in the September quarter.

“Revival in bank balance sheets hinges around overall economic growth, which is contingent on progress on the pandemic front. However, banks would need to further bolster their capital positions to absorb potential slippages as well as to sustain the credit flow, especially when monetary and fiscal measures unwind,” the RBI said.

“Banks would need to bolster capital positions to absorb potential stress as well as to augment credit flow when policy support is phased out,” the report advised.