RBI encourages banks to bolster resilience amid economic risks: Report

The Reserve Bank of India (RBI) is actively preparing banks to enhance their shock absorbers to mitigate potential economic challenges, according to brokerage firm Emkay. However, this move could have interim implications on growth. 

The central bank's efforts come in response to various risks, including global macro-economic spillovers, a prolonged interest-rate environment, increased growth in unsecured and risky loans, and concerns over stress in specific areas such as cards and low-ticket personal loans.

The RBI has consistently issued warnings and taken preemptive measures to reinforce the financial system's resiliency, covering credit, liquidity, and interest rate aspects while addressing operational and reputation risks.

Despite positive indicators such as receding non-performing assets and strong bank and corporate balance sheets, the RBI stressed on the need for banks to build shock absorbers, including maintaining a Super Common Equity Tier 1 (CET 1) ratio, to prepare for unforeseen risks.

Recent regulatory measures by the RBI include increased risk weights on select consumer credit by banks and non-banking financial companies (NBFCs), along with strengthening credit standards. 

The central bank has directed banks and NBFCs to unwind their Alternative Investment Fund (AIF) investments within 30 days to prevent potential ever-greening of loans or make 100 per cent provisions.

The RBI also highlights the potential impact of a prolonged period of high-interest rates on the banking sector, particularly through valuation losses in banks' investment portfolios. 

While the current financial system appears resilient, the RBI urges banks to maintain a balanced approach, addressing concerns such as the liquid asset ratio and credit-deposit ratio.

In response to slower deposit growth and concerns over liquidity conditions, the RBI encourages banks to reduce higher credit-deposit ratios. 

The central bank also stressed on the importance of caution in relying solely on preset algorithms for lending decisions, urging banks and NBFCs to ensure the robustness and regular testing of such models.

Furthermore, the RBI's recent review of Domestic Systemically Important Banks (D-SIBs) has led to increased CET 1 requirements for select banks, such as SBI and HDFC Bank. This move is expected to prompt these banks to strengthen their capital positions.

While the RBI's proactive measures aim to fortify the financial system, potential impacts on credit growth and margins are anticipated. 

Emkay suggests a preference for banks with strong capital, liquidity, and provisioning buffers, such as ICICI Bank, IndusInd, and HDFC Bank, as well as certain small/mid-cap banks like Karur Vysya Bank, Federal Bank, and Indian Bank.