The Reserve Bank said on Friday that banks must support growth while being vigilant about the lending behavior of entities whose loans were restructured during the pandemic period to stem slippage.
Banks had extended the moratorium on loan repayments and restructured advances to businesses to help them combat the impact of the COVID pandemic and subsequent lockdowns to stem the spread of the virus.
In its annual report released on Friday, the RBI said the banking sector has witnessed improved financial parameters despite the COVID-19 pandemic.
“However, vigilance should be placed on the credit behavior of the restructured advances and the possibility of greater slippage due to sectors relatively more exposed to the pandemic,” it said.
With support measures being lifted, some of the restructured accounts may face solvency problems, and the impact on bank balance sheets will become more apparent in the coming quarters, the report said.
Prudence ensures proactive recognition of non-viable accounts to trigger timely resolution, it added.
“As the economy recovers and credit demand rises, banks will need to focus in the future on supporting credit growth while being vigilant about evolving risks.
“It is necessary to ensure that new slippages are stopped and that bank balance sheets are strengthened to prevent future stress build-up,” according to the Reserve Bank’s annual report for the year 2021-22.
It went on to say that NBFCs and urban cooperative banks (UCBs) should consider weaknesses wherever they are in their balance sheets and ensure robust asset-liability management, in addition to improving the quality of their loan portfolios.
The central bank also said that in order to further strengthen the regulatory and supervisory framework, several measures are expected to be taken for banks and NBFCs in the current fiscal year.
Turning to the overall economic situation, the Reserve Bank said fiscal year 2020-21 presented many challenges, but a recovery is underway despite headwinds.
The future growth path will be determined by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within target while supporting growth and targeted fiscal policy support to aggregate demand, it added.