Reserve Bank of India (RBI) Governor Shaktikanta Das on April 27 said that the Reserve Bank is closely monitoring the business models of domestic lenders as it feels that bad strategies can lead to a crisis.
The RBI governor also said that recent developments in the US have seen an explosion of Lenders like Silicon Valley Bank And the rush to limit the transmission of stress throughout the system may be due to poor business models.
He added that Indian banks have been able to remain resilient and have not been adversely affected by the “recent spark of financial instability seen in some advanced economies”, courtesy the work done in this aspect by the RBI and the banks themselves. .
Mr. Das said, “Recent developments in the US raise a question whether the business model of the banks which have faced challenges was correct or not.”
“The RBI has started looking more closely at the business model of banks…the loopholes (in it) can lead to a crisis,” Mr Das said, speaking at the inaugural Global Conference on Financial Resilience organized by the College of Observers , which the central bank started last year.
Business models can sometimes create risks to parts of a bank’s balance sheet which can further turn into a bigger crisis, Mr Das said.
Recent events in the US and Europe’s banking landscape suggest that risks may emanate from areas of its balance sheet, which may have been considered relatively safe, Mr Das said. On something as basic as asset liability mismatch.
He urged the managements and bank boards to continuously assess financial risks and focus on building adequate capital and liquidity buffers beyond regulatory minimums for continued resilience and sustainable growth.
Mr. Das said that financial resilience is closely linked to a bank’s business model and strategy, and added that among other aspects, the RBI has set capital and liquidity buffers, and lenders have also been asked to respond to COVID-like times of abundant availability. This has prompted us to strengthen capital buffers. 19 crisis.
The Governor apprised the audience that in the recent past, Indian banks have also shown improvement in the extent of stress and capital buffers.
Gross non-performing assets ratio to come down to 4.41% by December 2022 from 5.8% in March 2022 and 7.3% in March 31, 2021. The overall capital adequacy for Indian banks in December 2022 was 16.1%, he said, adding that this was much higher than the minimum requirements.
Further, the macro stress test for credit risks indicates that scheduled commercial banks will be able to comply with the minimum capital requirements even under severe stress conditions, informed Mr Das.
Das said the RBI is also working to enhance organizational resilience within banks, adding that strengthening governance and assurance functions is a key focus.
He said that ultra-aggressive growth strategies or reckless pursuit of profits are often harbingers of future problems in banks, and asked banks to strengthen internal controls to match the risks arising from their business models. and demonstrate the adequacy of loss absorption capacity.
“Our approach is to flag in this area to senior management or the Board of Directors of individual institutions for remedial action. Remedial action has to be taken by them, our role as a supervisor or regulator is to address concerns on certain aspects of their business model. To point out that could become a bigger risk, challenge, threat going forward,” he said.
RBI is using data analytics, artificial intelligence and machine learning tools to capture potential and emerging risks, identify vulnerable large exposures of external entities and banks, and red flagged by its onsite supervisors offsite supervision teams Deep diving into areas. Das said.
It is also closely monitoring the liquidity position to ensure that divergence, if any, is picked up promptly for remedial measures. “Our overall approach to supervision has been proactive to minimize surprises, address concerns and address weaknesses early,” he added.
The RBI also wants the statutory auditors of regulated entities to function properly and engage with them where necessary, Mr Das said.
Informing that from FY204, the boards of state-run lenders will be able to take decisions regarding branch audit and selection of branches, Mr. Das said that the RBI is currently setting a new benchmark for the quality and coverage of such audits. is evaluating. Private sector lender.
Mr Das said while the advent of digital lending by non-banks and fintechs has flagged issues of fair practices and consumer protection, its comprehensive guidelines on digital lending released last year seek to address the concerns.
On the operational resilience front, Das cited a survey which included cyber security among the top-10 risks in 2022.