Indian Banks Face New Era of Resilience Amid Complex Uncertainties

Kolkata: Banks need to be prepared for managing uncertainties from varied sources beyond their balance sheets since shocks can emerge from geopolitics, climate change, artificial intelligence (AI), technological disruption and the reordering of supply chains, Reserve Bank of India deputy governor Swaminathan J said Monday.

"The next phase of banking resilience will be less about addressing known balance sheet stress and more about managing complexity and uncertainty," Swaminathan said on June 1, while delivering a speech on "Resilience by Design: Lessons from India’s Banking Sector" at Columbia University.

RBI published the speech Wednesday.

"A weak banking system can quickly transmit stress from financial balance sheets to firms, households, public finances and the broader economy," Swaminathan warned.

He called for attention from banks as well as supervisors as AI, cyber risk, third-party dependencies and climate-related risks raised the level of financial interconnectedness.

"The task, therefore, is not only to prepare banks for known risks, but also to make them adaptable to risks whose timing, form and transmission may be difficult to predict," he said, even as the Indian financial system enters this uncertain phase with healthier balance sheets, comfortable capital buffers, improved profitability and non-performing assets at multi-decade lows.

The entire financial ecosystem has become more interconnected with banks, non-banking financial companies, fintech entities, payment systems and third-party technology partners enjoying a fair share in credit delivery, payments, customer acquisition, servicing, making the transmission of risk more complex. Swaminathan however gave credit for banks' resilience to improved supervisory vigilance, stronger prudential frameworks, transparent recognition of stress, credible repair mechanisms and improvements within banks themselves.

The regulator also underscored the need for stronger underwriting standards and fair lending practices amid the expansion of retail credit and digital lending,

"Retail credit, digital lending and microfinance have expanded access, but they also require careful underwriting, fair recovery practices and close monitoring of borrower leverage," he said.

The broader Indian economy has also shown resilience, supported by strength in industrial and services activity, broad-based demand and improving corporate performance. Despite supply-chain disruptions, local inflation remained well within RBI's target level of 4%.

"Risk has a habit of building quietly in good times and introducing itself loudly when conditions change," he said, calling for improved governance and risk discipline. "Resilience must therefore be built before it is tested," he said.