Financial stability is now one of the three important objectives of monetary policy besides price stability and credit support.
The RBI since 2010 is publishing India Financial Stability Report, biannually, to assess financial stability scenario in the country.
The FSR reflects the collective assessment on risks to financial stability and the resilience of the financial system of India. The Report also discusses issues relating to development and regulation of the financial sector.
FSR is a collective assessment of subcommittee of Financial Stability and Development council (FSDC) on risks to financial system.
Why in News?
RBI has released the 20th edition of FSR in December 2019. The report becomes crucial in its reading due to the phase of domestic and global slowdown being experienced.
What all does the report mention?
On overall assessment of systemic risks FSR says that India’s financial system remains stable notwithstanding weakening domestic growth.
The resilience of the banking sector has improved following recapitalisation of Public Sector Banks (PSBs) by the Government.
However risks arising out of global/domestic economic uncertainties and geopolitical developments persist.
On Global and domestic macro-financial risks, FSR mentions that The global economy confronted a number of uncertainties like a delay in the Brexit deal, trade tensions, concerns of an slowdown, oil-market disruptions and geopolitical risks, leading to significant deceleration in growth.
These uncertainties weighed on consumer confidence and business sentiment, dampened investment intentions and unless properly addressed are likely to remain a key drag on global growth.
On Financial Institutions’ Performance and risks, FSR mentions that Scheduled commercial banks’ (SCBs) credit growth remained low at 8.7 per cent year-on-year (y- o-y) in September 2019.
Though Private Sector Banks (PVBs) registered double digit credit growth of 16.5 per cent.
SCBs’ capital adequacy ratio improved significantly after the recapitalisation of public sector banks (PSBs) by the Government.
SCBs’ gross non-performing assets (GNPA) ratio remained unchanged at 9.3 per cent between March and September 2019 which may decline to 9.0 per cent in March 2020. Private sector banks, too, could see an increase in gross NPAs from 3.9% to 4.2% in the period under consideration.
Provision Coverage Ratio (PCR) of all SCBs rose to 61.5 per cent in September 2019 from 60.5 per cent in March 2019 implying increased resilience of the banking sector.
On Financial sector’s regulation and developments, FSR called for the need for greater surveillance over large NBFCs. The Reserve Bank of India has said that failure of such companies can cause losses comparable to those caused by the big banks.
The central bank noted that global economic activity continued to face significant headwinds since the second half of 2018 culminating in a lower global growth forecast of 3.3 per cent in 2019 and therefore advanced economies’ (AEs) central banks have eased their monetary policy stance
The central bank noted that the domestic economy hit a soft patch recently as private consumption, the key driver of GDP, turned weak. This along with subdued new investment pipeline and a widening current account deficit have exerted pressure on the fiscal front.
Reviving private investment demand remains a key challenge going forward while being vigilant about the spillover from global financial markets.
The RBI report said reviving the twin engines of India’s economic growth — private consumption and investment while being vigilant about developments in global financial markets remain a critical challenge for the central bank.
While the outlook for capital inflow remains positive, India’s exports could face headwinds in the event of sustained global slowdown, but current account deficit is likely to be under control, reflecting muted energy price outlook.