RBI for carefully crafted strategy to deal with challenges in financial sector

The Indian financial sector will need a carefully crafted strategy to deal with the future challenges relating to climate change and technological innovations, in addition to the fallout of the COVID-19 pandemic, the Reserve Bank said on Tuesday.

In its 'Report on Trend and Progress of Banking in India 2020-21', the RBI said the assessment of the systemic impact of climate change on the economy and financial stability is still evolving and so are the responses of central banks and supervisors around the world.

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The Reserve Bank is actively engaged in conducting research on areas such as green finance and the impact of climate change on various macroeconomic variables such as inflation and growth.

Globally, as well as in India, the banking and non-banking sectors have weathered the COVID-19 disruptions well, supported by policy measures.

As economic growth picks up and policy measures are rolled back, the pandemic's impact on banks' balance sheets will be clearer.

Climate change and technological innovations pose medium-term challenges to the sector, which will need to be addressed through carefully crafted strategies, the report said.

"In a nutshell, the Indian financial sector is standing at crossroads: while the immediate impact of the fallout of COVID-19 will dominate the short-term, larger challenges relating to climate change and technological innovations will need a carefully crafted strategy," it said.

The Reserve Bank on its part will endeavour to ensure a safe, sound and competitive financial system through its regulatory and supervisory initiatives, it said.

India has reiterated its commitment to climate action at the United Nations Climate Change Conference (COP26) in November 2021 at Glasgow.

The report notes that as vaccination drives gathered pace across jurisdictions and economic activity hesitantly started turning around, time-bound and smooth unwinding of regulatory forbearances assumed importance from the viewpoint of financial stability.

In India, most pandemic measures had a well specified sunset clause, and some have run their course during the year.

However, the impact of these transient measures on banks' financial health is not immediately clear and can be fully fathomed only after passage of time, said the report.