“The global economy is now witnessing a renewed phase of turbulence with fresh headwinds from the banking sector turmoil in some advanced economies,” RBI Governor Shaktikanta Das said. “Bank failures and contagion risk have brought financial stability issues to the forefront.” Over the last month, Silicon Valley Bank, Signature Bank and Credit Suisse collapsed, raising financial stability concerns.
Therefore, it is incumbent upon the regulators and the regulated institutions to exercise due diligence in their risk management and corporate governance practices. Also, they need to pay close attention to asset-liability mismatches and the profile of their deposit base, while building up adequate capital buffers and conducting periodic stress tests, the governor noted.
RBI is now focusing on making sure the financial system is stable and secure, rather than just trying to control inflation over the last few years.
The Governor said that regulators need to identify potential vulnerabilities and take proactive regulatory and supervisory measures. The regulator needs to pay close attention to asset-liability mismatches and profile of their deposit base, while building up adequate capital buffers and conducting periodic stress tests.
While highlighting the need to be alert in identifying potential vulnerabilities and taking proactive regulatory and supervisory measures, RBI said it has focused on macro-and micro-prudential measures to prevent the build-up of financial vulnerabilities. RBI has adopted a prudent approach towards regulation and supervision and has taken several steps in these areas.
Over the last few years, RBI has implemented leverage ratio, liquidity coverage ratio (LCR), net stable funding ratio (NSFR), large exposures framework (LEF), guidelines on governance in commercial banks, scale-based regulatory (SBR) framework for NBFCs, among others.Also, to create a buffer to shield banks from adverse yield movements, RBI had advised banks to create an investment fluctuation reserve (IFR) with a desirable floor of IFR at 2% of the held-for-trading (HFT) and available for sale (AFS) portfolios. Moreover, RBI has uniformly applied capital and liquidity requirements to all banks, irrespective of their asset size and exposure.
The RBI has taken a unified and harmonised supervisory approach for commercial banks, NBFCs and urban cooperative banks and the focus is on identifying the root cause of vulnerabilities, rather than dealing with the symptoms alone. “As a result, the Indian banking system remains sound and healthy, with strong capital and liquidity positions, improving asset quality, better provisioning coverage along with improved profitability.”