Reserve Bank of India releases 19th issue of Financial Stability Report

New Delhi: The Reserve Bank of India has released the 19th issue of the Financial Stability Report (FSR).

“The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability, as also the resilience of the financial system. The Report also discusses issues relating to development and regulation of the financial sector,” RBI said in a statement.

The Central Bank said that India’s financial system remains stable in the backdrop of improving resilience of the banking sector, even though the emerging trends in global economic as also geopolitical environment pose challenges.

It however said that global economic activity continues to face significant headwinds since the second-half of 2018 culminating in a lower global growth forecast of 3.3 per cent in 2019. Adverse geopolitical developments and trade tensions are gradually but predictably taking a toll on business and consumer confidence.

“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,” RBI said.

The central bank added that reviving private investment demand remains a key challenge going forward while being vigilant about the spillover from global financial markets.

Credit growth of scheduled commercial banks (SCBs) picked up, with public sector banks (PSBs) registering near double digit growth. Capital adequacy of the SCBs improved after the recapitalisation of PSBs.

With the bulk of the legacy non-performing assets (NPAs) already recognised in the banking books, the non-performing asset (NPA) cycle seems to have turned around.

Provision coverage ratio (PCR) of all SCBs rose sharply to 60.6 per cent in March 2019 from 52.4 per cent in September 2018 and 48.3 per cent in March 2018, increasing the resilience of the banking sector.

Macro-stress tests for credit risk indicate that under the baseline scenario, SCBs’ gross nonperforming asset (GNPA) ratio may decline from 9.3 per cent in March 2019 to 9.0 per cent in March 2020.

Recent developments in the Non-banking financial companies (NBFC) sector have brought the sector under greater market discipline as the better performing companies continued to raise funds while those with ALM and/or asset quality concerns were subjected to higher borrowing costs.

Analysis of the financial network structure reveals that joint Solvency-Liquidity contagion losses to the banking system due to idiosyncratic failure of banks are lower for March 2019 than in March 2018 (FSR June 2018) due to a better capitalised public-sector banking system. Solvency contagion losses to the banking system due to idiosyncratic HFC/NBFC failure show that the failure of largest of these can cause losses comparable to those caused by the big banks, underscoring the need for greater surveillance over large HFCs/NBFCs, RBI added.