Context: RBI chief has cautioned about the approaching stress in the financial sector owing to the pandemic.
Impact of Pandemic:
- It has brought banks under severe stress as they are hit on both demand as well as supply fronts.
- On the demand side the slowdown in the economy is leading to business closures and job losses which is decreasing the demand for credit.
- On the supply front they are facing redemption pressures as masses are withdrawing their deposits in fear of bank failure or for meeting emergency expenditure.
- The banks will be facing an increase in NPAs (Non Performing assets) in coming future.
- It is now imperative to draw a recapitalisation plan for banks. It involves infusing new capital into banks by altering the debt to equity ratio.
- The minimum capital requirements of banks needs a revamp as intensity of Global Recessionary/Unprecedented events is on the rise.
- As situation returns to normalcy banks as well as NBFCs must do periodic stress tests so as to ascertain their stability and risk exposure, thereby avoiding a crisis like situation like Punjab and Maharashtra Co-operative Bank.
- Lending by Banks to NBFCs and Mutual Funds must be enhanced as both the segments are facing tremendous redemption pressures.
- A legislative backed Resolution Corporation must be established as mooted by the withdrawn Financial Resolution and Deposit Insurance Bill.
- The corporation will deal with resolution and revival of stressed financial firms, thereby avoiding a panic-like situation as in the case of Yes Bank.