26th Financial Stability Report (FSR)

In News

• Recently, the RBI’s latest Financial Stability Report (FSR) indicated that India’s banks and non-bank lenders can withstand even the worst of macro-economic stress.
  • RBI’s stress testing models have been criticised in the past for a significant upward bias. 

Major Highlights of the report 

Financial stability has been maintained.

• Domestic financial markets have remained stable and fully functional.
• The banking system is sound and well-capitalised.
• The non-banking financial sector has also withstood these challenges.
• Banks have enough capital to maintain the ratio above the minimum requirement till September 2023. 
• The decline in the capital adequacy ratio was on account of higher risk-weighted assets as lending activity picked up recently.
• The decrease in slippages, increase in write-offs and an improvement in loan growth brought the gross non-performing assets (NPA) ratio of banks further down to a seven-year low of 5%.
  • The net NPA ratio stood at a 10 year low of 1.3%. 
• Banks will be able to maintain a common equity tier-I capital ratio above the minimum requirement of 8%. 
• There is a 41% increase in the net profit of the banks and a 10% growth in net interest income (NII).

Challenges 

• India along with other emerging economies is facing several risks of:
  • Rising borrowing costs.
  • Debt distress.
  • Elevated levels of inflation.
  • Volatile commodity prices.
  • Currency depreciation.
  • Capital outflows.

Way Forward

• Preserving macroeconomic stability in this challenging environment will require safeguarding the domestic economy and the financial system through actions that mitigate the build-up of vulnerabilities and help smooth financial market adjustments.  

Source: FE