There has been a significant change in interest rates in successive monetary policy announcements for the US and India, where both countries have successively increased their rates over the past few months. This had an impact on the banking sector, and for the United States, there was financial stress, banking stress.
RBI Governor Shaktikanta Das on Wednesday highlighted how both India and the US handled the situation.
“In the United States, what happened is the rise in interest rates of a very high order in rapid succession led to a situation where banks and other lending institutions were under stress. High inflation is a challenge in the American economy, and the Fed was completely focused on inflation but the financial . institutions and banks did not adequately account for the change in the cycle, there was a belief that ‘low for long’ interest rates will continue to remain so for eternity, which is a wrong assumption,” he explained.
The Apex bank governor asserted that one should always keep their balance sheet so resilient that it can withstand the shocks that may arise when the cycle turns.
Citing an example of how the Indian regulator and banks deal with this situation he said, “We have prescribed capital and liquidity requirements and we have made them uniformly applicable to all scheduled commercial banks regardless of their asset size and exposure. We also have investment. fluctuation reserves required , which banks are supposed to create and they did.”
“So in India, we did not see the financial stress or banking stress because our regulatory requirements ensured that the banks themselves took the required steps and they were ready for a change of cycle,” Das stated.
The Reserve Bank of India governor asserted that the Indian banking sector continues to be resilient supported by improved capital ratios, asset quality and robust earnings growth. Financial indicator of NBFCs is also in line with that of the banking system.
While Indian banks and NBFCs are in a good place today, the RBI governor also warned them and said that banks and NBFCs need to strengthen their risk management at this time and build additional buffers to face any adversities in the business cycle .
“While banks and NBFCs are showing good performance now, sustaining it requires concerted effort. In good times like this, banks and NBFCs need to reflect and introspect where potential risks may originate. Now is the time for them to further strengthen their risk exposure . management practices, build additional buffers to face the situation if the business cycle turns unfavorable in the future. Good governance would be to stay prepared and be resilient in all situations,” the central bank governor further stated.
Reserve Bank of India Governor Shaktikanta Das spoke at FIBAC 2023 in Mumbai.