RBI cautions banks to be watchful of restructured loans

The Reserve Bank of India (RBI) has cautioned commercial banks to be watchful of the risk of increased ‘slippages’ on advances that were restructured during the COVID-19 pandemic, especially as the economy recovers from the impact of the public health crisis.

“The banking sector has witnessed improved financial parameters despite the COVID-19 pandemic,” the RBI observed in its annual report for 2021-2022 released on Friday. “There is, however, a need to be watchful of the credit behaviour of the restructured advances and possibility of increased slippages arising from sectors that were relatively more exposed to the pandemic,” the central bank warned.

“With the unwinding of support measures, some of the restructured accounts might face solvency concerns, with the impact on banks’ balance sheets becoming clearer in the upcoming quarters. Prudence warrants proactive recognition of any non-viable accounts to activate timely resolution,” it added.

The RBI said going forward, as the economy recovers and credit demand rises, banks would need to focus on supporting credit growth while being vigilant of the evolving risks.

“Care needs to be taken to ensure that fresh slippages are arrested, and banks’ balance sheets are strengthened to avoid future build-up of stress,” it emphasised.

Highlighting that the setting up of the National Asset Reconstruction Company Ltd. (NARCL) would help in the resolution of large value, legacy stressed assets, and which would serve as a time-efficient mechanism for reviving investor interest in primary and secondary markets for stressed assets, RBI said going forward, continued commitment, professionalism and transparency in operation would help in making the exercise cost- and time-effective.

“The setting up of the National Bank for Financing Infrastructure and Development (NABFID) is expected to shift the burden of long-term financing away from banks. The NABFID can also play an active role in the development of bond and derivatives markets that are necessary for infrastructure financing,” it said.

Stating that NBFCs and urban cooperative banks (UCBs) would have to be mindful of frailties, wherever they exist, it said they must ensure robust asset-liability management in their balance sheets, apart from improving the quality of their credit portfolios.

“Considering the significant share of funding absorbed by NBFCs at the system level, continued attention to their financial health is warranted from the viewpoint of financial stability,” the RBI observed. “In order to further strengthen the regulatory and supervisory framework, several measures are expected to be put in place for banks and NBFCs during 2022-23,” it added.

At the broader level, while 2021-22 had brought many challenges, a recovery was underway notwithstanding the headwinds. 

“The future path of growth will be conditioned by addressing supply side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending,” it said.