Financial Stability Report: The Key Takeaways From RBI’s Financial Stability Report

The Reserve Bank of India, in its biannual Financial Stability Report, said the country’s financial system remains stable despite weakening domestic growth. But risks persist from global economic uncertainties and geopolitical developments.

The central bank noted a delay in Brexit, trade tensions, a “whiff” of an impending recession, oil market disruptions and political risks were among the major causes of a significant slowdown in global 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.”

In India, the report took note of the slackening demand in the July-September quarter that has caused the slowdown. It said exports could take a hit if the global slowdown persists. However, that’s unlikely to blow the country’s current account deficit out of proportions, it said.

Here are the key highlights of the report:

Banks

• Credit growth of scheduled commercial banks has slowed “noticeably” to 8.7 percent in September 2019 from 13.2 percent in March 2019. Private banks reported double-digit growth.
• Capital adequacy has improved after the recapitalisation of state-run lenders.
• Provision coverage ratio of all banks rose to 61.5 percent in September 2019 compared with 60.5 percent in March 2019.

• This will be due to the change in the macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.

NBFCs And HFCs

• Recent developments in the sector have brought greater market discipline.
• Mutual funds have reduced their investment in commercial papers and debt of non-banking financial firms and housing finance companies.
• NBFCs and HFCs, hence, are relying more on long-term bank loans for their funding.
• Bad loan ratio for NBFCs increased to 6.3 percent in September 2019, compared with 6.1 percent in March 2019.

Fraud Reporting Rises

• Banks reported frauds worth Rs 1.13 lakh crore in the first half of 2019-20.
• However, the RBI noted significant time lag in reporting of frauds by banks.
• It said that 97.3 percent of the frauds reported actually occurred in previous years.
• There were 21 cases of frauds above Rs 1,000 crore each reported in the first half of 2019-20, compared with four in the full financial year 2018-19.

Perception Of Risk

• The RBI noted that perception of domestic growth, fiscal, corporate sector and asset quality risks for banks increased between April and October.
• About 32 of the respondents felt that prospects of the banking sector are going to improve marginally in the next one year with resolutions under the Insolvency and Bankruptcy board playing a key role.
• 25 percent of the respondents feel that banking prospects will deteriorate marginally in the next on year.
• Spillovers from trade war and the geopolitical tensions may impact the market.
• Stock market correction and a possible deterioration in collateral values are seen as important risks to financial market stability.

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