Print Friendly, PDF & Email

Sansad TV: Perspective: RBI’s Financial Stability Report

sansad_tv

 

 

Introduction:

Reserve Bank of India’s Financial Stability Report which was released recently. Among the key highlights of the 26th issue of the report, the central bank states that the global economy is facing formidable headwinds with recessionary risks looming large. The interplay of multiple shocks has resulted in tightened financial conditions and heightened volatility in financial markets. The Indian economy is confronting strong global headwinds. Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability. The floating demand of bank credit as well as early signs of investment cycle revival are benefiting from the improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks. The gross non- performing ratio (GNPA) of scheduled commercial banks fell to a seven-year low of 5% in September 2022. The net non-performing assets (NNPA) ratio stood at a 10-year low of 1.3%, whereas private banks NNPA ratio was below 1%.

Key Highlights of the report:

  • The global economy is facing formidable headwinds with recessionary risks looming large. The interplay of multiple shocks has resulted in tightened financial conditions and heightened volatility in financial markets.
  • The Indian economy is confronting strong global headwinds. Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability.
  • Buoyant demand for bank credit and early signs of a revival in investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks (SCBs).
  • The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5.0 per cent and net non-performing assets (NNPA) have dropped to ten-year low of 1.3 per cent in September 2022.
  • Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level capital to risk weighted assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9 per cent, 14.0 per cent and 13.1 per cent, respectively.
  • Stress tests for open-ended debt mutual funds showed no breach in limits pertaining to interest rate, credit and liquidity risks. Consolidated solvency ratio of both life and non-life insurance companies also remained above the prescribed minimum level.

Macrofinancial Risks analysis:

  • For emerging market economies (EMEs), the challenges are even harsher as they encounter global spillovers, debt fragility, currency volatility and capital outflows.

Domestic Economy and Markets

  • Inflation, though elevated, is retreating in response to frontloaded monetary policy actions and supply side interventions.
  • In the financial sector, buoyant demand for bank credit and early signs of a revival in investment cycle are benefiting from improved asset quality, a return to profitability and resilient capital and liquidity buffers.
  • These strengths are helping the financial system weather external spillovers, tightening global financial conditions and high volatility in financial markets.

Financial Institutions:

  • The provisioning coverage ratio (PCR) has been increasing steadily since March 2021 to 71.5 per cent. The profit after tax of SCBs registered a growth of 40.7 per cent in H1:2022-23, led by strong growth in net interest income and a reduction in provisions.
  • Macro-stress tests for credit risk reveal that SCBs are well-capitalised and all banks would be able to comply with the minimum capital requirements even under adverse stress scenarios.
  • Network analysis indicates that the total outstanding bilateral exposures among constituents of the financial system are stable.
  • SCBs continued to have the largest bilateral exposures in the Indian financial system, which reached pre-pandemic levels in September 2022.
  • A simulated contagion analysis shows that losses due to failure of five banks with the maximum capacity to cause contagion would not lead to failure of any additional bank.

Regulatory Initiatives and Other Developments in the Financial Sector

  • Enhancing the resilience of nonbank financial intermediaries (NBFIs) and assessing climate-related financial risks are among the key priorities.
  • On the domestic front, the emphasis remains on improving the resilience of the financial system and fostering a conducive credit environment that supports a sustainable economic recovery and preserves financial stability.

Assessment of Systemic Risk

  • Monetary tightening in advanced economies, tightening of financial conditions, geopolitical risks, global growth uncertainty and growing risks from private cryptocurrencies and climate change are cited as the major contributors to rise in global, financial market and general risks.
  • The majority of the respondents saw further improvement in credit prospects for the Indian economy and remained confident about the stability of the Indian banking sector.
  • Nearly ninety per cent of the respondents assessed that the prospects of the Indian banking sector are likely to improve or remain unchanged over a one-year horizon.

 

Read the Sansad TV article in PDF Format HERE