monetary policy

RBI Speech: Key initiatives to protect financial system from Covid19

This article will share insights on step being taken by RBI for negating impact of Covid19 on financial system. This article is inspired by RBI governor speech. Readers can visit rbi website and check complete speech.

As world is facing a global pandemic in form of coronavirus (Covid19), its impact on financial system is huge. The outbreak of coronavirus has resulted in worst case scenario of industrial output, job growth and human indices. Covid19 has dented global value chain, labour and capital movement across nation, and socio-economic conditions of world population.

RBI initiatives to protect financial system

Monetary Policy Measures

  • Monetary policy was already in an accommodative mode before the outbreak of COVID-19, with a cumulative repo rate cut of 135 basis points between February 2019 and the onset of the pandemic.
  • Temporary spike in food inflation in the second half of 2019-20.
  • Liquidity conditions were also kept in ample surplus all through since June 2019.
  • The lagged impact of these measures was about to propel a cyclical turnaround in economic activity
  • MPC has cumulatively cut the policy repo rate by 250 basis points since February 2019.
  • The liquidity measure announced by the RBI since February 2020 aggregate to about ₹9.57 lakh crore (equivalent to about 4.7 per cent of 2019-20 nominal GDP).

Financial Stability and Developmental Measures

  • For the five years between 2015-16 and 2019-20, the Government had infused a total of ₹3.08 lakh crore in public sector banks (PSBs).
  • Stressed assets in the banking system had declined and capital position had improved
  • RBI strong framework for resolution of stressed assets in addition to implementing multiple measures to strengthen credit discipline and to reduce credit concentration
Ratios March 2020 March 2019
overall capital adequacy ratio for scheduled commercial banks (SCBs) 14.8 per cent 14.3 per cent
CRAR of PSBs 13.0 per cent 12.2 per cent
gross NPA ratio of SCBs 8.3 per cent 9.1 per cent
net NPA ratio of SCBs 2.9 per cent 3.7 per cent
Provision Coverage Ratio (PCR) 65.4 per cent 60.5 per cent
Gross NPAs of NBFCs 6.4 per cent 6.1 per cent
Net NPAs of NBFCs 3.2 per cent 3.3 per cent
CRAR of NBFCs 19.6 percent 20.1 per cent


Supervisory and Regulatory Initiatives


  • RBI has put in place systems and structures to identify assess and proactively mitigate or manage the vulnerabilities amongst financial institutions.
  • The unified approach is aimed at addressing the growing size, complexities, and inter-connectedness amongst banks and NBFCs.
  • Effectively addressing potential systemic risks that could arise due to possible supervisory or regulatory arbitrage and information asymmetry.
  • to ensure a better focus on the risky institutions and practices; to deploy appropriate range of tools and technology to achieve the supervisory objectives; and to enhance capability to conduct horizontal or thematic studies across supervised entities on identified areas of concern.
  • Reserve Bank has strengthened its off-site surveillance mechanism to identity emerging risks and assess the vulnerabilities
  • Strengthening the supervisory market intelligence capabilities, through personal and technological intelligence.
  • The Yes Bank reconstruction scheme forged a unique public-private partnership between leading financial entities of India, which helped the bank’s revival, successfully safeguarded the interest of the bank’s depositors and ensured financial stability.

NBFCs and Cooperative banks

  • For NBFCs, active engagement with stakeholders was useful to identify emerging risks and take prompt action.
  • RBI has taken steps to strengthen the risk management and liquidity management framework of NBFCs.
  • NBFCs with a size of more than ₹5,000 crore have been advised to appoint a functionally independent Chief Risk Officer (CRO).
  • Government-owned NBFCs have been brought under the Reserve Bank’s on-site inspection framework and off-site surveillance.
  • In case of the Urban Co-operative Banks (UCBs), special efforts are being made to move towards a risk-based and pro-active supervisory approach.
  • An early warning system with a stress-testing framework has been formed for timely recognition of weak banks.
  • Formation of an ‘umbrella organization’, has been approved to provide liquidity, capital, IT and capacity building support to UCBs.
  • The exposure limits of the UCBs have been brought down to reduce credit concentration and the priority sector targets have been revised substantially upwards so that UCBs remain focused on micro and small borrowers.
  • The recent amendments in the Reserve Bank of India Act, 1934, effective from August 1, 2019 and the Banking Regulation Act, 1949 will facilitate our supervision processes with respect to NBFCs and UCBs, respectively.

RBI approach in dealing with financial crisis due to Covid19

The new supervisory approach will be two-pronged

  1. Strengthening the internal defenses of the supervised entities
  2. Greater focus on identifying the early warning signals and initiate corrective action.

Key focus of supervisory plan

  • Reserve Bank activated an elaborate business continuity plan for its own operations as well as ensured that banks also activate their own business continuity plans.
  • Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system. We
  • All banks, non-deposit taking NBFCs (with an asset size of ₹5,000 crore) and all deposit-taking NBFCs need to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year 2020-21.
  • All banks and financial institutions need to work out on possible mitigating measures including capital planning, capital raising, and contingency liquidity planning.

Off-site surveillance mechanism

  • The objective of the off-site surveillance system would be to ‘smell the distress’
  • Initiate pre-emptive actions.
  • Use of market intelligence inputs and on-going engagements with financial institutions on potential vulnerabilities.
  • The off-site assessment framework, which takes into account macro and micro variables, is more analytical and forward looking and aimed at identifying vulnerable sectors, borrowers as well as supervised entities.

Major challenges arising due to coronavirus impact

  • The economic impact of the pandemic – due to lock-down and anticipated post lock-down compression in economic growth – may result in higher non-performing assets and capital erosion of banks.
  • Minimum capital requirements of banks, which are calibrated based on historical loss events, may no longer be considered sufficient enough to absorb the losses.
  • Mutual funds have emerged as major investors in market instruments issued by NBFCs.

The supervisory approach of the Reserve Bank is to further strengthen its focus on developing financial institutions’ ability to identify, measure, and mitigate the risks.

  • Higher emphasis is now being given on causes of weaknesses than on symptoms.
  • The symptoms of weak banks are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct, and liquidity concerns.
  • The causes of weak financial institutions can usually be traced to one or more of the following conditions: inappropriate business model, given the business environment; poor or inappropriate governance and assurance functions; poor decision making by senior management; and misalignment of internal incentive structures with external stakeholder interests.
  • Special emphasis on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions).
  • Supervised entities generally tend to focus more on business aspects even to the detriment of governance aspects and assurance functions.
  • The thrust of the approach, therefore is, to improve the risk, compliance, and governance culture amongst the financial institutions.

Key focus area

  • Recapitalization plan for PSBs and private banks (PVBs).
  • Redemption pressure on NBFCs and mutual funds.
  • Increasing share of bank lending to NBFCs and the continuing crunch in market-based financing faced by the NBFCs and Housing Finance Companies (HFCs).

End note

Financial system in India is functioning smoothly, including all the payment systems and financial markets.  There is requirement of strict policy measures, i.e., monetary, fiscal, regulatory and structural reforms, for a speedier recovery in economy activity while minimising near-term disruptions. The Reserve Bank is making continuous assessment of the changing trajectory of financial stability risks and upgrading its own supervisory framework to ensure that financial stability is preserved. Banks and financial intermediaries have to be ever vigilant and substantially upgrade their capabilities with respect to governance, assurance functions and risk culture.

Paper on Governance in Commercial Banks in India

  • Reserve Bank has released a discussion paper on “Governance in Commercial Banks in India”
  • Its objective is to align the current regulatory framework with global best practices while being mindful of the context of the domestic financial system.
  • The main emphasis of the discussion paper is to encourage separation of ownership from management – while owners focus on the return on their investment, the management should focus on protecting the interest of all stakeholders.
  • The Board, on its part, should set the culture and values of the organization; recognise and manage conflicts of interest; set the appetite for risk and manage risks within that appetite; exercise oversight of senior management; and empower the oversight and assurance functions through various interventions.

Key financial terms

  • Lender of Last Resort (LOLR)
  • financial backstop measures
  • Bagehot’s dictum1
  • nominal GDP
  • policy repo rate
  • accommodative mode
  • CRAR
  • gross NPA ratio
  • net NPA ratio
  • Provision Coverage Ratio
  • capital adequacy ratio
  • Banking Regulation Act, 1949
  • amendments in the Reserve Bank of India Act, 1934
  • Business Continuity Plan
  • asset quality
  • liquidity
  • profitability
  • capital adequacy
  • tail risks to the financial system


1 thought on “RBI Speech: Key initiatives to protect financial system from Covid19”

  1. Pingback: What RBI Governor thinks of rising opportunities in India | Xamnation

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