RBI’s New Playbook: Cash Flow Stress Tests Set to Make Indian Banks Unshakeable

The Reserve Bank of India (RBI) has further intensified its liquidity stress testing procedure for Scheduled Commercial Banks (SCBs) by following a strict cash flow analysis procedure. The action, released to the public in the latest annual report of the central bank, is intended to further fortify banks and enable them to meet their financial commitments even during the most severe market stress.

 

The new cash flow analysis will also simulate the impact of extreme but plausible scenarios on the liquidity positions of banks, providing a forward-looking assessment of their ability to withstand crises. Through the identification of weaknesses and the provision of adequate liquidity buffers, the RBI hopes to enhance the resilience of the banking system, safeguard depositors' interests, and reduce the risk of a systemic nature.

 

Apart from this, the RBI will also develop an internal liquidity stress test framework for NBFCs and extend macro stress testing to large and mid-sized UCBs. The central bank is also considering the banks' exposure to carbon-emitting industries and the associated climate transition risks and will implement a 'Growth-at-Risk' model to have a better idea of the way in which financial vulnerabilities can affect future growth opportunities for the economy.

 

Besides this, RBI is also setting up prudential standards for climate risk management and will also make final the norms for climate-linked financial risk disclosure comprising stress testing and scenario analysis.

 

Source: The Hindu Business Line