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“At the RBI, we have started taking a closer look at the business models and strategies of banks.

“Take your commercial decisions, we will not interfere, but we will see what kind of vulnerabilities and what kinds of risks are building up, and our first priority would be to caution banks themselves,” Das said at the SBI’s Banking and Economic Conclave.

He said the RBI’s supervision is now almost on a real-time basis and is not an annual exercise anymore. Technology has enabled a more intensive look towards the supervision process.

While banks take their commercial decisions, they should also factor in the available liquidity and also the kind of interest rate structures they are providing. These decisions should be taken based on prudent principles, he said.

The governor said irrespective of the fact that liquidity is in surplus, the risk pricing of various loans being extended by banks has to be done diligently by banks themselves.

“The mere fact that there is excess liquidity should not lead to any mispricing of loans because this excessive liquidity is not going to be a permanent feature,” Das said.

At a particular time last year, the economy needed liquidity because the financial markets were freezing up and there were episodes of mutual funds suddenly collapsing, and the RBI had to step in with massive liquidity support, he added.

The liquidity support ensured the orderly functioning of the financial markets.

The RBI is now moving towards a rebalancing of liquidity. It is making efforts to provide only that much liquidity which the system requires, Das noted.

“Let me make it very clear that there will always be adequate liquidity to meet the requirements of the productive sectors of the economy. But slowly we want to rebalance the economy in a manner that banks are left with that much liquidity which they need and not excess,” he added.

Earlier in his speech, the governor said banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the Board, instead of being driven by a mechanical ‘follow the market’ approach.

“In their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies. Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors,” he said.

According to him, the active role of the Board, especially in challenging the proposals of the management, becomes critical and will contribute towards a more diligent and balanced approach to decision making.

He said the board of directors carry the responsibility of being guardians of the trust that depositors have reposed in a bank.

“The RBI has high expectations from the oversight role of the Board, its composition, Directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests,” he added.

Das said banks have weathered the COVID-19 shock better than expected, with the gross non-performing assets and capital adequacy ratios of banks further improved in September 2021 from June 2021 levels.

“Going forward, there are risks and challenges, which require serious introspection and action on the part of the banking system,” he cautioned.

Das said one of the challenges banks are likely to face would be in dealing with the stressed borrowers impacted by COVID-19.

During the two waves of COVID-19, the RBI announced Resolution Framework 1.0 and 2.0 to provide relief to the borrowers and banks.

“As the support measures start unwinding, some of these restructured accounts might face solvency issues over the coming quarters. Prudence would warrant proactive recognition of such non-viable firms for pragmatic resolution measures,” he said.