Post demonetisation, marketplace has portrayed topsy-turvy situations. But certainly, there are more pros than cons, which the economy has witnessed and validated. Economy is floating with higher reserves and liquidity, thereby rendering more transparency and economic prosperity.
However, banks were seen at the gaining end. The BankNifty reclaimed the position of 18,600 post demonetisation. This rise was owing to windfall of deposits which the bank received in the Mega cash-clean up drive initiated by the Centre. Due to deposits, the risk is high. However, banks are struggling with weak zones.
A biyearly released report released by the RBI called the ‘RBI’s Financial Stability Report’ sowed that the Indian financial system is risk-prone. This report suggests the assessment of the banking system strength. It also assess the system’s capacity to counter and confront unceremonious shocks in the market place.
Owing to higher exposure to loan defaulters for lenders clubbed with worsening asset quality at banks, the Indian financial system is exposed to a comprehensive risk structure. If the top three borrowers default in payment, it is likely that the banking institutions’ profits will also be eroded.
The report stated, “The banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity.”
From a future perspective, the report also suggested, “Given the higher levels of impairment, SCBs may remain risk averse in the near future as they clean up their balance sheets and their capital position may remain insufficient to support higher credit growth.”
Banks are in a bid to restore their normalcy. Therefore, they are eluded from granting loans to various sectors including but not limited to Infrastructure, power, engineering, steel and iron. Banks are restraining their loan granting capabilities which is keeping them aloof from the productive businesses and purposes.
“While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s fi nancial system,“ RBI Governor Urjit Patel wrote in the report.
