'Can be self-defeating': RBI Governor warns banks against extreme risk aversion

The Reserve Bank of India (RBI) Governor Shaktikanta Das today advised banks to deeply look within and  focus on reorienting business model post COVID-19 pandemic."Extreme risk aversion can be self-defeating. It is certainly not desirable," said Governor in a keynote at a virtual banking summit.

Shaktikanta Das said the banks should look for opportunities in  sunrise sectors. "There  are opportunities in the rural sector, start up, renewables, logistics, value chain etc," said Das. The banks have turned risk-averse in last few years as slowdown in the economy impacted asset quality adversely. While the RBI has been cutting rates and keeping the liquidity tap in surplus mode, the banks are lining up at the reverse repo window to deposit back the money.

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In its annual report, the RBI has revealed that it absorbed surplus liquidity of Rs 284.4 lakh crore through reverse repos in 2019-20. This has  resulted in loss of interest of Rs 12,904 crore to the central bank. There are also indications that surplus liquidity would continue in order to support the economy since the risks of recession is real. RBI Governor also assured the market that the central bank has not exhausted its ammunition. While the market believes that there is just a 25 basis points room available to cut the repo rate,  Governor said the monetary policy committee (MPC), while keeping the rates unchanged in August policy, has decided to keep its gun powder dry.

The RBI is also keeping an eye on the 2-year restructuring window provided by it to banks for restructuring loans of corporate and retail borrowers. "We expect an efficient and diligent implementation of the resolution plan," said Das.  There are fears in the market that the restructuring window would be misused as many corporates have done in the past by colluding with bank officials.  In fact, K V Kamath committee has been tasked with recommending the parameters for one-time restructuring. The banks have the freedom to set their own parameters for individual retail loans.

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As per latest figures, as high as 40 per cent of the loan book of the entire banking sector is under a six months moratorium ending August this month. There are expectations that these loans would come for a restructuring post August. The RBI has given time till December to restructure the loans.

Also read: RBI takes Rs 12,904 crore COVID-19 hit due to risk averse banks