Financial Stability Report: Reserve Bank of India (RBI)

What is it about?

• The FSR 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.
• The Report also discusses issues relating to the development and regulation of the financial sector.
• It has released the 22nd issue of the Financial Stability Report (FSR) recently in January 2021.

Key issues in the report

• Expected Increase in Gross Non-Performing Asset (GNPA) Ratio
  • Macro stress tests for the Fiscal Year 2020-21 indicate that the GNPA ratio of all SCBs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario and may escalate to 14.8% under a severe stress scenario.
  • It indicates that the GNPA ratio of all SCBs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario and may escalate to 14.8% under a severe stress scenario. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.
  • The Capital to Risk-weighted Assets Ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8% in September 2020 from 14.7% in March 2020, while their Gross Non-Performing Asset (GNPA) ratio declined to 7.5% from 8.4%, and the Provision Coverage Ratio (PCR) improved to 72.4% from 66.2% in the said period.
  • Non-Banking Financial Companies (NBFCs) credit grew at a tepid pace of 4.4% on an annual YearOver-Year basis in comparison with the growth of 22% a year ago.
• Other areas of concern
  • With the inter-bank market continuing to shrink and with a better capitalization of banks, the contagion risk to the banking system under various scenarios declined in comparison with March 2020.
  • Bank credit growth has remained low-spirited, with the moderation being broad-based across bank groups. The credit flow to the manufacturing sector has been low-spirited when the output of the sector is emerging out of a prolonged contraction.
  • Managing market volatility is challenging as there’s a disconnect between certain segments of the financial sectors and the real economy has been accentuating both in India and globally.
  • The Capital to Risk-weighted Assets Ratio (CRAR) of the Scheduled Urban Co-operative Banks (SUCBs) declined from 9.70% to 9.24% between March and September 2020.