RBI’s Financial Stability Report Flags Rising NPAs, Global Economic Risks

Syllabus: GS3/Indian Economy

Context

• Recently, the Reserve Bank of India (RBI) released its Financial Stability Report (FSR), December 2024 highlighting several critical aspects of the Indian and global financial landscapes.
  • Financial Stability Report (FSR) is published by RBI bi-annually on behalf of the Financial Stability and Development Council (FSDC).

Key Highlights of the Report

• Stress Tests and Resilience: Macro stress tests conducted by the RBI demonstrate that most SCBs have sufficient capital buffers to withstand adverse scenarios.
  • The resilience of mutual funds, clearing corporations, and non-banking financial companies (NBFCs) is also validated through these tests.
• Government Finance: The central government’s debt-to-GDP ratio is expected to decrease from 62.7% in 2020-21 to 56.8% by 2024-25.
  • Similarly, states’ outstanding liabilities are projected to decline from 31% to 28.8%.
• Economic Growth Projections: The report projects that the Indian economy will expand by 6.6% in FY25 (2024-25), driven by a revival in rural consumption, increased government spending, and strong services exports. 
• Rising Non-Performing Assets (NPAs): The report indicates a potential rise in the share of bad loans among commercial banks.
  • Under baseline stress scenarios, the Gross Non-performing Asset (GNPA) ratio could increase from 2.6% in September 2024 to 3% by March 2026. 
• Domestic Financial Stability: Despite global uncertainties, the Indian financial system remains robust.
  • The soundness of Scheduled Commercial Banks (SCBs) is supported by strong profitability, and adequate capital and liquidity buffers.
  • The return on assets (RoA) and return on equity (RoE) for banks are at decadal highs.
• Sectoral Insights: The FSR highlights concerns in specific sectors, such as microfinance and consumer credit, which require close monitoring. 
• Insurance Sector: It maintains a robust solvency ratio, indicating its stability.

Key Concerns Highlighted in the FSR of RBI

• High Public Debt: Although the Union government’s debt-to-GDP ratio is expected to decrease from its pandemic peak, it remains a concern for long-term fiscal sustainability.
• Global Economic Vulnerabilities: These include stretched asset valuations, high public debt, prolonged geopolitical conflicts, and emerging technological risks.
  • These factors pose medium-term risks to global financial stability.
• Geopolitical Conflicts: Prolonged geopolitical conflicts can disrupt global supply chains, affect commodity prices, and lead to financial market volatility, all of which can have adverse effects on the Indian economy.
• Emerging Technological Risks: Cybersecurity threats, data privacy issues, and the potential for technological disruptions in financial services are highlighted as areas requiring close monitoring and robust regulatory frameworks.
• Climate Change: Extreme weather events and the transition to a low-carbon economy could have significant implications for financial institutions and the broader economy.

Source: BS