The country’s financial system is sound but lenders should desist from extreme risk aversion during COVID-19 pandemic and beyond, Reserve Bank Governor Shaktikanta Das said on Friday.
In his foreword to the bi-annual Financial Stability Report (FSR), Das said the top priority right now for banks and financial intermediaries should be for augmenting capital levels and improve resilience.
“In the evolving milieu, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” Das said.
The comments from Das come at a time when credit growth has declined.
“The financial system in India remains sound; nonetheless, in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority,” Das said.
Financial sector stability is a prerequisite for giving confidence to businesses, investors and consumers, he said, adding “we have to remain extremely watchful and focused”.
Das said governments, central banks and other public agencies across countries have made coordinated efforts to alleviate financial stress and build confidence and these measures have stabilised the financial system and markets.
However, the outlook for the financial system and markets “remains highly uncertain”, he added.
In a reference to the boom in stock markets amid the pandemic, which is set to contract the GDP in FY21, Das said the release of the FSR coincides with a growing disconnect between the movements in certain segments of financial markets and real sector activity.
“The pandemic hit India in a period of growth moderation. The ensuing disruptions in demand conditions and supply chains have been aggravated by global spillovers,” the Reserve Bank of India Governor said.
He, however, said signs of gradual recovery from the nationwide lockdown are visible.
The challenges that lie ahead have to be addressed with the overarching objective of preserving long-term stability of the financial system, which is critical for nurturing the recovery, he said, adding in the post-pandemic world, the focus will be on calibrated unwinding of the special dispensations introduced in the last few months.
The governor asked financiers to undertake a reappraisal of business models and asset markets to adapt to a new normal in a non-disruptive manner.
Constant vigilance is a necessity because of the contagion risks, he noted.
IT platforms have worked well in the times of social distancing but the gains need to be consolidated, he said, making it clear that there is no room for complacency on cyber security.