Shaktikanta Das said the real test for PSU banks is the ability to tap the capital market to raise funds

Indicating a softer approach on rate cuts in the wake of economic slowdown, Reserve Bank of India Governor Shaktikanta Das said on Monday that growth is the top priority at a time when the country's banking system is facing many challenges. In his inaugural address at the Indian Banks' Association annual flagship conference, FIBAC 2019, the RBI governor also said the real test for public sector banks is their ability to tap the capital market to raise funds.

"Growth is the top priority today, but it is important to look at financial stability along with growth. Business community is dealing with real challenges in the economy. The MPC (monetary policy committee) finds growth to be the highest priority at this juncture," Mr Das said.

The BSE Sensex at 37631.50 points at noon on Monday was up 0.75 per cent.

In its fourth consecutive bi-monthly monetary policy rate cut made earlier this month, the RBI lowered the repo rate by 35 basis points to 5.4 per cent.

Mr Das said he expected banks to move quicker on linking the lending rates with the RBI's repo rate towards better transmission to support consumption and demand.

"The real test For PSBs is the ability to access the capital market. Increasing currency and debt crises globally adds headwinds to financial stability. Weaker than expected global growth is one of the risks to financial stability. There are global headwinds from geopolitical and trade tensions," he said.

Underlining the need for a robust non-banking financial company (NBFC) system, Mr Das said the RBI is exploring the regulatory changes needed for housing finance companies (HFCs) and has sent suggestions on PSU bank reforms to the government.

"We want to ensure a robust and stable NBFC system. The size of NBFC sector forms 25 per cent of combined financial services in India. The RBI is also analysing the regulatory changes needed for housing finance companies," he said.

"RBI stress tests indicate that NPAs (non-performing assets or bad loans) may decline by March 2020 and the central bank is keeping close watch on inter-connects between banks and NBFCs," he added.

He also said that although state-run banks' profitability has been lacklustre despite strong capitalisation, the banking system in the country is resilient enough to withstand external economic shocks.

The economy is in grip of a severe slowdown, while the domestic automobile sector is facing its worst crisis in 20 years.

The Society of Indian Automobile Manufacturers (SIAM) reports that 300 dealerships have shut down in recent times. Sales of cars, tractors and two-wheelers have declined considerably. SIAM said that about 10 lakh jobs have been hit in the auto component manufacturing industry.

Health of the real estate sector, which is a massive indicator of the state of the economy and has links with about 250 ancillary industries such as bricks, cement, steel, furniture, electrical and paints, is causing a major concern. Due to the demand slowdown, both the sectors have seen a huge build-up of inventories.

Fast-moving consumer goods (FMCG) companies have reported a decline in volume growth in the April-June quarter. While the labour force survey, released by the government in July, showed a record high unemployment rate of 6.1 per cent for 2017-18, a recent RBI report does not present a brighter picture.

The RBI consumer confidence survey showed a drop in consumer confidence in July on account of a pessimist outlook on job creation and on the overall economic scenario.

Amidst all the gloom, foreign portfolio investors (FPIs) continue to pull out from the equity market on account of a tax surcharge levied in the latest Budget.