RBI fears moratorium to take a toll on banks' financial health

Moratorium on repayment of loans and their restructuring may have a negative impact on the financial health of the banks going ahead, unless they are closely monitored and judiciously used, the RBI said in its 2019-20 annual report on Tuesday. Even as the bad loans or NPAs at the banks have come down, the regulatory dispensations that the pandemic has necessitated in terms of moratorium and loan restructuring may have implications for banks, RBI report added.

"Although gross and net non-performing asset ratios had come down in March 2020 along with receding slippage ratios, the economic fallout of the pandemic is likely to test this resilience, especially since the regulatory accommodations announced in the wake of the outbreak have masked the consequent build-up of stress," said the RBI.

The central bank had announced a variety of relief measures including moratorium on repayment of loans and one-time restructuring to help the economy recover from the negative impact of coronavirus.

Macro stress tests reported in the July 2020 Financial Stability Report suggest that non-performing assets may surge 1.5 times above their March 2020 levels under the baseline scenario and by 1.7 times in a very severely stressed scenario.

Banks'recapitalisation

Against this backdrop, a recapitalisation plan for public and private sector banks assumes critical importance.

"The minimum capital requirements, which are calibrated on the basis of historical loss events, may no longer suffice to absorb post-pandemic losses. The Reserve Bank has already advised banks and NBFCs to carry out COVID-19 stress tests and take necessary remedial measures proactively," the report said.

Economic recovery

RBI said that the government's consumption will continue to support current economic demand while private consumption will likely lead the recovery when it takes hold after the coronavirus outbreak eases.

"The upticks that became visible in May and June after the lockdown was eased in several parts of the country, appear to have lost strength in July and August, mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into Q2," the RBI said. More protracted spread of the coronavirus pandemic, deviations of the monsoon from the predicted normal rains and global financial market volatility are key downside risks to growth, the central bank said.

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