Reserve Bank of India Releases Financial Stability Report

On 29^th December, 2022, Reserve Bank of India (RBI) released Financial Stability Report (FSR). It provided overall evaluation on risks to stability of the Indian Financial Stability.

What is Financial Stability Report (FSR)?

FSR is a semi-annual publication report published by Reserve Bank of India (RBI) after approved by the Sub Committee of the Financial Stability and Development Council (FSDC). The FSR takes inputs from all the financial sector regulators, i.e. RBI, Stock Excange Board of India (SEBI), Pension Fund Regulatory & Development Authority Act (PFRDA),  Insurance Regulatory and Development Authority of India (IRDAI) including Ministry of Finance.

The FSR is a periodic excerise which reviews the nature, implications and magnitude of risks that may have a effect on the financial institutions, markets, infrastructure, and the macroeconomic environment. This FSR also evaluates the resilience of the financial sector of the economy.

Content and Brief Summary of the Chapters in the Report:

In the December FSR, the report has three chapters and they are

Chapter I: Macrofinancial Risks

Chapter II: Financial Institutions: Soundness and Resilience

Chapter III: Regulatory Initiatives in the Financial Sector

Now, Let us see the brief summary of each chapters

Chapter I – Macrofinancial Risks:

The chapter 1 of the FSR describes that despite challenging global environment and spillover effects across the world, the Indian economy is moving towards path of recovery. The Indian Financial System shows the healthier which enables a healthy recovery of credit flows to a level of showing improved profits.

Emerging Market Economies (EMEs) face greater risks as there is a risks of downside for the Global economy. EMEs has to confront with rising borrowing costs, debt, instable commodity prices, high inflation, capital outflows and currency depreciation. In this challenging conditions, it is very important to preserve macroeconomic stability by protecting the domestic economy and financial system through action which alleviate buil-up of vulnerabilities and enhance smooth movement of financial market.

Eventhough there is a challenging global environment the Indian economy and domestic financial system remains stronger. The banking system are more stable by exhibhiting improved profitability and asset quality, with enough levels of liquidity. Improving domestic economic prsopects along with prudential regulatons supports the finances of the non-banking sector.

Chapter II – Financial Institutions: Soundness and Resilience

The Chapter II describes the conditions and resilence of the Financial Institutions. Due to the consolidation of the banking sector’s balance sheet, the ongoing reduction in bad loans and the buffering of risk absorbing capacity the Indian Financial Sector has remained stronger. According to the Macro Stress tests, even under worst-case scenario, all banks would have enough capital the regulatory minimum capital requirements. Stress tests, shows that some non-banking financial Insitutions (or companies) may be sensitive to liquidity shocks. However, consequent additional solvency loss and contagion risks are minimal.

The Gross Non-Performing Assets (GNPA) ratio, of Common Equity Tier 1 (CET1) Scheduled Commerical Banks (SCBs), have been consistently moving down to a seven-year low of 5% in September, 2022. The Net NPA ratio has fallen to a ten-yar low of 1.3% of total assets. In First Half of 2022-23 (i.e. H1: 2022-23), the Profit After Tax (PAT) of SCBs have increased by 40.7%. Thisi mainly due to strong growth in net interest income and a reduction in provisions.

The CRAR of urban co-operative banks (UCBs) rose to 16.1 per cent in September 2022 while that of NBFCs stood at 27.4 per cent. The consolidated solvency ratio of the insurance sector remains above the minimum threshold limit of 150 per cent.

Network analysis indicates that the total outstanding bilateral exposures among constituents of the financial system are stable. SCBs continued to have the largest bilateral exposures in the Indian financial system, which reached pre-pandemic levels in September 2022. A simulated contagion analysis shows that losses due to failure of five banks with the maximum capacity to cause contagion would not lead to failure of any additional bank.

Chapter III – Regulatory Initiatives and Other Developments in the Financial Sector

Chapter III describes about the initiatives taken by Regulators and other developments in the financial sector. Based on continuous Risks assessment the Financial Sector Regulations are made along with pro-active policy responses. In the present challenging global environment, the regulatory efforts are mainly concentrated to address vulnerabilities of core financial markets and non-banking financial intermediation. The Major goal of regulators are to protect the financial system from negative impact of environmental risks (includes both domestic and global). The another key are of focus for regulators is increasing threat of cyber risks that has the potential to rise the susceptabilities at system as well as at the institutional levels.

Internally, the main objective is to protect domestive financial sytem both from internal and external shocks along with preserving financial stability and protecting customers. The regulatory measures are intended to improve access to finance, protection of customers, digitalisation, reducing regulatory costs, easing compliance and to strengthen the financial intermediaries. Regulators are remain steadfast in their commitment to develop a robust and efficient financial system for the Indian economy.

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