As the economy reels under the pandemic and post lockdown woes, Reserve Bank of India (RBI) Governor Shaktikanta Das is of the view that extreme risk aversion by financial institutions will have adverse outcomes for all.

Noting that India’s financial system remains sound, Das, in his foreword to the RBI’s latest Financial Stability Report, wrote that in the current environment, the need for financial intermediaries to proactively augment capital and improve their resilience has acquired top priority.

“In the evolving milieu, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” he wrote.

The Governor’s statement gains significance as concerns have been raised that banks are still risk averse and are largely shying away from lending in general, except for the sovereign guaranteed ECLGS loans for MSMEs.

The Financial Stability Report for July 2020 also shows that bank credit, which had considerably weakened during the first half of 2019-20, slid down further in the subsequent period with the moderation becoming broad-based across bank groups. “Subdued bank credit shows clear signs of risk aversion,” the report said.

The Governor also said that currently there is growing disconnect between the movements in certain segments of financial markets and real sector activity.

The pandemic hit India in a period of growth moderation and the ensuing disruptions in demand conditions and supply chains have been aggravated by global spillovers, he added.

“Of late, signs of a gradual recovery from the nationwide lockdown are becoming visible,” Das said.