24th Financial Stability Report: RBI

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Recently, the Reserve Bank of India released the 24th issue of the Financial Stability Report (FSR).

About Financial Stability Report (FSR)

It is published by RBI bi-annually on behalf of the Financial Stability and Development Council, an umbrella group of regulators which gives an overview of the health of India’s financial system.
It reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system in the context of contemporaneous issues relating to development and regulation of the financial sector.
The RBI looks at the state of both the global as well as domestic economy.
It focuses on public and private banks with the following aspects:
- Capital availability for working
- Cost of NPAs and whether they are manageable
- Credit flow in different sectors of the economy
- Credit flow at personal levels (households)
- Macro-financial risks in the economy
- Macro-financial risks refer to the risks that originate from the financial system but affect the wider economy as well as risks to the financial system that originate in the wider economy.
- Stress tests are also performed by RBI as part of FSR

Significance

The report helps in assessing the health of the financial systems of the economy.
It helps as an Early Warning System in case of any financial issues.
Coming from the Central Bank, it is reliable and the growth or fallouts can be trusted.
Making the fallouts in the Report as points to work on will give the country a direction towards growth.

Major Highlights

Resurfacing COVID-19 infections:
- Global economic recovery has been losing momentum in the second half of 2021 in the face of resurfacing COVID-19 infections.
- Supply disruptions and bottlenecks, elevated inflationary levels and shifts in monetary policy stances and actions across advanced economies and emerging market economies.

On the domestic front, progress in vaccination has enabled the recovery to regain traction after the debilitating second wave of the pandemic,
The corporate sector is gaining strength and bank credit growth is improving.

Capital to risk-weighted assets ratio (CRAR:)
- The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) rose to a new peak of 16.6 percent and their provisioning coverage ratio (PCR) stood at 68.1 per cent in September 2021.
Gross Non-Performing Asset (GNPA):
- Macro stress tests for credit risk indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario.
- SCBs would, however, have sufficient capital, both at the aggregate and individual levels, even under stress conditions.
Financial institutions in India:
- They have remained resilient amidst the pandemic and stability prevails in the financial markets, cushioned by policy and regulatory support.

Levels of risks:
- There are five levels of risks — very high, high, medium, low and very low.
- For India, the main sources of risks are commodity prices, domestic inflation, equity price volatility, asset quality deterioration, credit growth and cyber disruptions.

Present Status of Global Economic Recovery

The Goods Trade Barometer of the World Trade Organization (WTO) shows that the World merchandise trade volumes, which had risen 22.4 per cent year-on-year in Q2 (April to June) of the 2021 calendar year, have been slowing in the second half of the year.
- The decline in the barometer reflects a combination of tapering import demand and disrupted production and supply of widely traded goods such as automobiles and semiconductors.

The Baltic Dry Index is a measure of shipping charges for dry bulk commodities

It crossed its highest mark in more than a decade in October 2021, but it recorded a sudden drop after that.

The Global Economic Surprise Index, which compares incoming data with economists’ forecasts to capture the surprise element.

Similarly, as the actual growth data diverged from the previous forecasts, the Global Economic Surprise Index (GESI)went into negative territory during July, August and September (Q3:2021).

Recommendations

The report called for close monitoring of stress in stress in micro, small and medium enterprises (MSME) as also in the microfinance segment going forward.
PSBs have to partake in certain mandated lending programmes — for example, self-help groups (SHG), Kisan credit card (KCC) — as also education loans (domestic).
RBI, however, warned non-banking financial firms and urban co-operative banks to be mindful of frailties on the liquidity front and ensure robust asset-liability management, apart from improving the quality of their credit portfolios.
- Stress tests showed “a significant number of NBFCs would be adversely impacted in the event of liquidity shocks

What is Non Performing Asset (NPA)?

NPAs are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time. Simply stated, NPAs are those loans which have ceased to generate income for the bank.
Types of NPA:
- Sub Standard: A sub-standard asset is one which is classified as an NPA for a period not exceeding twelve months.
- Doubtful: A doubtful asset is one which has remained as an NPA for a period exceeding twelve months.
- Loss: A loss asset is one where loss has already been identified by the bank or an external institution, but it is not yet completely written off, due to its recovery value, however little it may be.

Capital Adequacy Ratio (CAR)

It is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Source:TH

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