Banks need to strengthen corporate governance, says RBI report

The banking sector needs to strengthen corporate governance and risk management practices to deal with the uncertainties created by the coronavirus pandemic, the Reserve Bank said on Tuesday.

With the rapid technological advancements in the digital payments landscape and the emergence of new entrants to the FinTech ecosystem, banks should also prioritize upgrading their IT infrastructure and improving customer service, along with strengthening their cybersecurity.

“Banks should strengthen their corporate governance practices and risk management strategies to build resilience in an increasingly dynamic and uncertain economic environment,” the RBI said in its report on 'Trend and Progress of Banking in India 2020-21'.

It further said that while bank lending remained subdued in an environment of risk aversion and subdued demand conditions in 2020-21, an uptick has begun in the second quarter of 2021-22, with the economy emerging from the shadows of the second wave of COVID-19. 19.

Going forward, the recovery of bank balance sheets depends on overall economic growth, which relies on progress on the pandemic front, it said.

However, banks should further strengthen their capital positions to absorb potential slippages and maintain credit flows.

In a nutshell, the report said: "India's financial sector is at a crossroads: While the immediate impact of the fallout from COVID-19 will dominate the near term, greater challenges related to climate change and technological innovations will require a carefully crafted strategy".

The Reserve Bank stressed that it will work to ensure a safe, sound and competitive financial system through its regulatory and supervisory initiatives.

In the period 2020-21, the consolidated balance sheets of scheduled commercial banks (SCBs) have grown in size, despite the pandemic and the resulting contraction in economic activity.

In 2021-22, budding signs of recovery so far are visible in credit growth. Deposits rose 10.1 percent at the end of September 2021, compared to 11 percent a year ago, the report said.

On post-COVID-19 recapitalization requirements, the RBI said that based on its capital position as of September 30, 2021, all public and private sector banks maintained the capital conservation buffer (CCB) well above 2.5 percent.

“However, in the future, banks would need a larger capital buffer to meet the challenges due to the ongoing stress borrowers are experiencing and to meet the economy's potential credit requirements,” it said.

The top bank also stressed that coordinated strategies for timely capital infusion should be handed over by the banks.

Furthermore, the banking sector should build adequate buffers and remain vigilant for emerging risks as the economy recovers from the impact of the COVID-19 pandemic.