Financial Stability Report

Recently, the Reserve Bank of India (RBI) released its biannual Financial Stability Report. As per the report, asset quality of the banking system has improved with Gross Non-Performing Assets (GNPA) ratio declining to the lowest in 7 years.

About the Financial Stability Report –

• It is published by RBI bi-annually on behalf of the Financial Stability and Development Council, an umbrella group of regulators which gives an overview of the health of India’s financial system.
• It reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system in the context of contemporaneous issues relating to development and regulation of the financial sector.
• The RBI looks at the state of both the global as well as domestic economy. 
• It focuses on public and private banks with the following aspects:
  • • • Capital availability for working
      • Cost of NPAs and whether they are manageable
      • Credit flow in different sectors of the economy
      • Credit flow at personal levels (households)
      • Macro-financial risks in the economy
      • Macro-financial risks refer to the risks that originate from the financial system but affect the wider economy as well as risks to the financial system that originate in the wider economy.
      • Stress tests are also performed by RBI as part of FSR

Key highlights of the FSR –

• Gross NPA –
  • • Non-Performing Assets (NPA) are loans and arrears lent by banks or financial institutions whose principal and interests are delayed beyond 90 days.
    • As per the report, the GNPA ratio has declined to a seven-year low of 5 per cent in September, 2022.
    • The GNPA ratio estimate is based on the macro-stress test performed to assess the resilience of banks’ balance sheets to unforeseen shocks.
• Capital to Risk (Weighted) Assets Ratio –
  • • CRAR is the ratio of a bank’s capital to its risk-weighted assets and current liabilities.
    • The higher a bank’s CAR, the more likely it is to be able to withstand a financial downturn or other unforeseen losses.
    • As per the report, the CRAR of 46 major banks is 15.8 per cent which is way higher than the minimum capital requirement which is 9 per cent.
• Performance of NBFCs –
  • • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances.
    • As per the report, the NBFC sector too has recovered strongly in the wake of the second wave of Covid, with asset quality showing a continuous improvement.
• Financial Markets – As a result of the interplay of multiple shocks, financial conditions have tightened and there is a heightened volatility in the financial markets.
• Insurance Sector – For both life and non-life insurance companies, the consolidated solvency ratio remained above the prescribed minimum level.