As RBI works from home, Governor Das is relying on off-site surveillance to 'smell the distress'

• The Reserve Bank of India too has been forced to work from home during the coronavirus pandemic in the country.
• With on-site inspection being restricted, the apex banking institution is strengthening its off-site surveillance mechanism instead to flag off financial risks.
• RBI governor, Shaktikanta Das, explained how this mechanism works and what it has done so far during his keynote address at the 7th State Bank of India (SBI) Banking & Economics Conclave keynote on Saturday, July 11.

As the coronavirus pandemic continues to loom large, India’s apex banking institution — the Reserve Bank of India (RBI) — is also forced to work from home. Its off-site surveillance mechanism is being enhanced to “smell the distress,” said RBI governor Shaktikanta Das as on-site inspection is now limited.

“The RBI has strengthened its off-site surveillance mechanism to identify emerging risks and assess the vulnerabilities across the supervised entities for timely action,” he explained during the 7th State Bank of India (SBI) Banking & Economics Conclave keynote on Saturday, July 11.

Das explained that it would be premature to talk about the actual technology that’s been put into play but he did disclose that new systems have been put in place to collect and analyse the data. “We are relying more on data analytics and other aspects,” he said.

How RBI’s off-site surveillance mechanism works
The goal RBI’s off-site mechanism is to identify emerging risks and assess vulnerability across the supervised entities for timely action. This includes banks, non-banking financial corporations, and urban cooperative banks (UCBS), which were recently brought under the RBI’s purview.

According to Das, this requires the use of market intelligence inputs and ongoing engagements with financial institutions on possible and potential vulnerabilities. “We are strengthening the supervisory market intelligence capabilities of RBI with the help of both personal and technological intelligence,” he explained.

The off-site assessment framework takes into account macro and micro variables making it “more analytical and forward-looking,” Das said. The combination of the three factors helps the RBI identify vulnerable sectors, borrowers as well as supervised entities.

The bank is making special efforts in a risk-based and proactive supervisory approach to identify weakness in banking operations are early as possible. “Early warning system with stress testing framework has also been formed for timely recognition of weak banks for appropriate action,” said Das.

Banks need to build up their buffers
So far, the offsite surveillance mechanism has helped the apex bank provide a cushion for banks from the immediate effects of the coronavirus pandemic. “The medium-term outlook continues to be uncertain,” said Das.

He explained that the most crucial thing for banks to do right now is build up buffers and raise capital to ensure credit flow and build resilience in the financial system. “Policy action for the medium-term would require a careful assessment of how the crisis unfolds,” Das said.

The RBI has advised all banks, non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality liquidity, profitability and capital adequacy for the current financial year.

Based on the outcome of such stress testing, the financial institutions have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning.

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