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.

Way Ahead:

  • 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  • A legislative backed Resolution Corporation must be established as mooted by the withdrawn Financial Resolution and Deposit Insurance Bill.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.