RBI releases 22nd issue of Financial Stability Report: Key Highlights

The Reserve Bank of India released the 22nd issue of the Financial Stability Report (FSR) on Monday. The report reflects an assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the risks to financial stability in the country and its resilience in the context of the development and regulation issues of the financial sector.

In the initial phase of the pandemic, RBI and govt focused their policy actions on mitigating stress and restoring normal functioning. Now their focus has shifted to supporting and preserving the recovery of businesses and households.

Positive news on the vaccine front came with an optimistic outlook; however, the second wave of the outbreak with the discovery of virulent strains continues to hit the optimism.

Policy measures taken by regulators and the government have ensured the smooth functioning of domestic markets and financial institutions.

The disconnect between specific segments of financial markets and the real estate sector has increased since last year.

Bank credit growth has remained subdued, with the moderation largely seen in bank groups.

However, banks' performance parameters have improved owing to coronavirus aid extended by the government.

Financial ratios of Scheduled Commercial Banks have improved in the past year. Sept 2020 data of key financial ratios are:

Capital adequacy ratio (CAR): Up by over one percent —15.8 percent

Gross non-performing asset ratio (GNPA): Declined by 0.9 percent — 7.5 percent

Provision coverage ratio (PCR): Up by more than six percent — 74.2 percent

The estimates of GDP for FY21, released on January 7, indicate a hike in GNPA. The data showed a six percent GNPA hike in Sept 2021, under the baseline scenario. In a severe stress scenario, the ratio might increase by more than 7 percent. To combat rising NPAs, the report suggests SCBs build up capital proactively.

Total bilateral exposure of banks (banks leading to and borrowing from entities in the financial system) increased marginally in Q2 FY20.

With continual shrinkage in the interbank market and better capitalization, contagion risks to the banking system declined compared to March 2020.