
Reserve Bank of India (RBI) Governor Shaktikanta Das has cautioned banks against solely focusing on their bottom lines and neglecting the potential risks associated with profit-driven business models. He emphasized that while profitability is important, it should not come at the expense of managing hidden vulnerabilities within these models. Das made these remarks at an event organized by the College of Supervisors, where he discussed the importance of maintaining a resilient and crisis-resistant financial system.
Proactive Measures to Identify and Address Risks
Das highlighted the RBI’s commitment to detecting and addressing potential crises before they escalate. While acknowledging that it is not always possible to anticipate every crisis, he affirmed the RBI’s dedication to making best efforts in this regard. The governor mentioned specific actions taken by the central bank, such as moderating credit growth in unsecured credit and lending to non-banking financial companies (NBFCs), which have resulted in a slowdown in lending to these sectors. He also mentioned unconventional measures, like having an executive director of the central bank address the board of a regulated entity if signs of stress are detected.
Need for Adaptive and Forward-Looking Approaches in the Financial Sector
Governor Das emphasized the importance of the financial sector adopting an adaptive and forward-looking approach to navigate the challenges posed by the current global environment, characterized by turbulent global spillovers and uncertainties. He cited recent banking crises, such as the Silicon Valley collapse in the US and the Credit Suisse incident in Europe, as examples that prompted a global discussion on whether regulators were adequately prepared. Das assured that the RBI is actively working to fine-tune the regulatory architecture and supervision to promote long-term resilience and stability in the financial system.
Identifying Sources of Financial Stress
According to Das, financial stress can arise from multiple sources. It may stem from internal factors, such as deficiencies within a bank, financial entity, or NBFC. Even seemingly minor problems in the balance sheet or financial institution, if overlooked by management, can escalate and create significant stress over time. Undetected fraud within these organizations can also contribute to stress. External factors, such as climate-related issues, changes in business cycles, or misaligned monetary policies, can trigger financial stress as well. Additionally, technological failures or dependencies, like IT system outages, can further contribute to financial instability. Failures in other parts of the financial system can also impact a financial entity, potentially leading to a crisis.
In conclusion, Governor Das’s remarks emphasize the need for banks to prioritize risk management alongside profitability. The RBI is actively working to identify and address potential crises in a proactive manner, while also promoting adaptability and forward-looking approaches within the financial sector. By fine-tuning regulatory measures and supervision, the RBI aims to enhance the long-term resilience and stability of the financial system.