Mumbai: Amid the banking sector turmoil, India’s banking system continues to remain resilient and stable, Reserve Bank of India Governor Shaktikanta Das said. He, however, cautioned lenders against build up of any asset-liability mismanagement and asked them to keep conducting internal stress tests to ensure proper risk assessment.

“We have been engaging with the banks over the last several years and I am happy to report that the way the Indian banking system has evolved and the way it is positioned today, the Indian banking system continues to be resilient and stable,” Das said in a lecture in Kochi on Friday.

Without mentioning the name of Silicon Valley Bank (SVB) and Signature Bank, Das said that recent developments in the US banking system has brought to the fore the criticality of the banking sector regulation and supervision. These are areas that have a significant impact on preserving the financial stability of every country.

“More specifically, these developments in the banking system of the US, especially over the last one week and thereafter, drive home the importance of ensuring prudent asset-liability management, robust risk management and sustainable growth in liabilities and assets, undertaking periodic stress tests and building up critical buffers for any unanticipated future stress,” the Governor said.

These developments also show cryptocurrencies and assets can be a real danger to banks, he said. Das has been critical of private cryptocurrencies as he feels allowing these to grow can lead to the next financial crisis.

The Governor said he is not privy to the reasons due to which the two US-based lenders failed, but as an outsider it appears that the deposit growth in one of the banks was excessive at a time when credit did not grow correspondingly. The said lender had invested the excess money in certain government and private bonds.

“There it is necessary to do a proper risk assessment. These investments were made when the interest rates were low. This situation needs a careful understanding by every bank. When you are putting money in certain bonds at very low interest rates, it is expected that the banks should do a proper risk assessment.

“It would be wrong to expect the interest rates to remain low forever. In fact, for more than 10 years in advanced countries, the interest rates were low. They were low for long but that should not have lulled anybody into the belief that the interest rates will remain low for all times. When inflation goes up, there will be a rate hike by the central bank,” he said.

Das said the RBI, while engaging with the banks over the last few years, has been emphasising on doing internal stress tests, ensuring robust risk assessment and management and having proper asset-liability management.

“Every credit when it is given out, it should be backed by appropriate risk assessment,” he said. The Governor said the RBI’s supervisory systems have been strengthened significantly in recent years.

The frequency and intensity of on-site supervisory engagement is now based on the size as well as riskiness of the institutions, he said, adding that the off-site supervision has also become more intense and frequent. “The focus is now more on identifying the root cause of vulnerabilities, rather than dealing with the symptoms alone,” he said.

Agencies

KR Desk