Growth Cure for Financial Stress–the economic times

Clipped from: https://economictimes.indiatimes.com/blogs/et-editorials/growth-cure-for-financial-stress/ET Edit

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.

The latest Financial Stability Report put out by the Reserve Bank of India (RBI) does aver that the worst is behind us, in its appraisal of the pandemic’s impact, but adds that recovery path remains uncertain. The report is clear-cut that timely proactive measures across monetary, liquidity and banking regulatory domains have kept the financial system smoothly functioning, for now.

However, the current, forbearance-induced easing of risk indicators would reverse when regulation normalises. The only way to avert a serious financial problem is for the economy to grow robustly, so that fresh revenue and earnings enable companies to service their loans. That calls for bold fiscal support to boost growth.

The report asserts that credit support packages would need to be unwound in a calibrated fashion, and, hence, calls for focused financial development and risk-mitigation efforts to better manage economic recovery. The report finds that while performance indicators and asset quality of scheduled commercial banks (SCBs) have improved of late, the capital ratios could change in a non-linear fashion due to uncertainties in recovery.

The gross non-performing assets (NPAs) of SCBs have come down to 7.5% as of September, and net NPAs have declined to 2.1%, which is credible albeit mostly due to regulatory forbearance. Also noteworthy is the sharp drop in the slippage ratio to 0.15, which shows new accretion to NPAs in a quarter as a ratio of standard advances in the beginning of the quarter.

What is now required are sector-specific policy initiatives to boost performance in the corporate sector, including in travel, tourism, hospitality and real estate, and improve incomes of households. The situation calls for concerted, bold action.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

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