RBI’s Financial Stability Report

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Recently, the Reserve Bank of India released its latest Financial Stability Report (or FSR).

About FSR

• FSR is Published twice each year and is one of the most crucial documents on the Indian economy.
• 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.
• 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

Key Findings

• Capital Adequacy Ratio: 
  • The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) increased to 16.03 per cent and the provisioning coverage ratio (PCR) stood at 68.86 per cent in March 2021.
• Non Performing Asset: 
  • Macro stress tests indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; 
  • and to 11.22 per cent under a severe stress scenario, although SCBs have sufficient capital, both at the aggregate and individual level, even under stress.
  • A kind of regulatory moratorium was announced, resulting in reduced NPAs.
• Credit Demand: 
  • Going forward, as banks respond to credit demand in a recovering economy, they will need to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress.
  • Demand for consumer credit across banks and non-banking financial companies (NBFCs) has decreased amidst the second wave of Covid-19. 
• Retail loans and loans to MSME:
  • NPA levels and quality of credit might deteriorate in this sector.
  • Consumer loan climate will get affected by this
  • The only thing to worry about is this point
• Nurturing the global recovery: 
  • Sustained policy support, benign financial conditions and the gathering momentum of vaccination are nurturing an uneven global recovery.
• Covid 19: 
  • On the domestic front, the ferocity of the second wave of COVID-19 has dented economic activity, but monetary, regulatory and fiscal policy measures have helped curtail the solvency risk of financial entities, stabilise markets, and maintain financial stability.
  • Write-offs as a percentage of GNPA at the beginning of the year, fell sharply as compared to 2019-20, except for private banks.
• RBIs Protection:
  • Banks remain relatively unaffected by distractions caused due to the pandemic and are well protected by regulatory, monetary and fiscal policies. 

Significance

• The report helps in assessing the health of the financial systems of the economy.
• Assessing it biannually works as a check and balance in the working 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.

Challenges for Indian Economy

• The decline in Gross Capital Formation and Final private consumption: Final consumption is negative because the capital formation is very low. People are not willing to invest in anything except for essential needs.
• Banks increasing dependence on government security is making a huge fiscal deficit.
• Reviving demand for consumers taking into account the agricultural and rural sector.
• The NPA gap is 5% between public and private sector banks. This needs to be bridged by reorganizing Public sector banks and making them more efficient, ownership change. Privatization did well during the Pandemic.
• Unless investment happens, recovery of the economy will be difficult. 

Way Ahead

• The government needs to universalise PDS for a year.
• The government also has to make direct cash transfers to affected populations.
• The focus should be on expanding employment guarantees to urban areas.
• The input tax relief could be provided to producers in selected sectors such as metals, oil, chemicals, processed food and automobiles.
• Public investment in physical and social infrastructure is the need of the hour.
• Suspending FRBM for two years should be the initial step to finance any fiscal revival attempt.
• If the economy has to be revived, then a stimulus of large magnitude is necessary.

Sources: IE