Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday warned of higher bad loans as a direct fallout of the pandemic and said the medium-term outlook for the economy remains uncertain, with supply chains and demand yet to be fully restored.

A protracted lockdown, which began on March 25 and continued in various phases albeit with the significant easing of restrictions since early May, has resulted in the severe disruption of industrial production and consumer spending, with GDP growth forecast to contract sharply in April-June, pushing Indian economic growth for 2020-21 into a deep recession.

“The economic impact of the pandemic – due to lock-down and anticipated post lock-down compression in economic growth – may result in higher non-performing assets and capital erosion of banks,” Shaktikanta Das said at the 7th SBI Banking and Economics Conclave.

A recapitalisation plan for public sector banks (PSBs) and private banks (PVBs) has, therefore, become necessary, he said, adding despite the substantial impact of the pandemic on daily lives, the financial system of the country, including all the payment systems and financial markets, are functioning without any hindrance.

“The Indian economy has started showing signs of getting back to normalcy in response to the staggered easing of restrictions. It is, however, still uncertain when supply chains will be restored fully; how long will it take for demand conditions to normalise; and what kind of durable effects the pandemic will leave behind on our potential growth,” Shaktikanta Das said.

Shaktikanta Das said the 2008 global financial crisis and the current one show that such economic shocks have “fatter tails” than generally believed, and that the country’s financial system should have larger capital buffers.

The RBI, Shaktikanta Das said, has been guided by the age-old wisdom that ascribes the role of Lender of Last Resort (LOLR) to the central bank.

It has cut interest rates by 115 basis points in response to the pandemic, taking the total policy rate reduction to 250 basis points since February 2019, Shaktikanta Das said.

Also, the RBI has provided liquidity of Rs 9.57 lakh crore, eased some bad loan provisioning norms and allowed loan moratoriums for retail customers.

Shaktikanta Das said targeted and comprehensive reform measures already announced by the government should help support the country’s potential growth.

Also, special emphasis is being placed on the assessment of business model, governance and assurance functions (compliance, risk management and internal audit functions), as these have been the areas of heightened supervisory concern.

“RBI has taken a number of important historic measures to protect the financial system and support the real economy in the current crisis. While the eventual success of our policy responses will be known only after some time, they appear to have worked so far,” Shaktikanta Das said.