Financial Stability Report

According to the Reserve Bank of India’s latest financial stability report, gross non-performing assets (GNPAs) of the banking system have declined from 7.4 per cent in March 2021 to a six-year low of 5.9 per cent in March 2022.

This is under the baseline scenario driven by higher expected bank credit growth and declining trend in the stock of GNPAs, among other factors, the report said.

Important definitions –

• Non Performing Assets — In most cases, debt is classified as non-performing, when the loan payments have not been made for a minimum period of 90 days.
• Gross non-performing assets — GNPAs are the sum of all the loans that have been defaulted by the individuals who have acquired loans from the financial institution.
• Net non-performing assets — NNPAs are the amount that is realised after provision amount has been deducted from the gross non-performing assets.

Findings of the report –

• More stressed public sector — While public sector banks continue to be more stressed than private banks as for the former, bad loans stood at 7.6 per cent of advances, while for the latter, the figure is lower at 3.7 per cent.
• Capital Adequacy Ratio — The banks have witnessed an improvement in their capital position, with the capital to risk weighted assets ratio rising to 16.7 per cent at the end of March 2022.
  • • The ratio measures a bank’s financial stability by measuring its available capital as a percentage of its risk-weighted credit exposure. It is one of the most important financial ratios used by investors and analysts.
    • It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk. The higher the CRAR of a bank the better capitalised it is.
• Provisioning coverage ratio (PCR) — It improved to 70. 9 per cent in March 2022 from 67.6 per cent in 2021.
  • • PCR is the percentage of funds that a bank sets aside for losses due to bad debts. A high PCR can be beneficial to banks to buffer themselves against losses if the NPAs start increasing faster.
• Slippage ratio — The slippage ratio, declined across bank groups during FY22. Write-off ratio declined for the second successive year to 20 percent in FY22.
  • • Slippage ratio measures new accretions to NPAs as a share of standard advances at the beginning of the period.
    • Slippages refer to bank’s assets becoming non-performing asset (NPA) owing to the borrower not paying interest for over 90 days.
• Buffer to withstand shocks — According to the RBI’s report, banks, as well as non-banking financial institutions, have sufficient capital buffers to withstand shocks, and support from it during Covid helped banks arrest their GNPA ratio.
• Asset quality — Data presented in the report shows that banks have seen an improvement in their asset quality across all major sectors.
• Segments — Bad loans have declined even in sectors such as engineering goods, gems and jewellery, and construction sectors where they have been significantly elevated in the past.
• Declining share of large borrowers — The RBI report also shows that the share of large borrowers in the banks’ loan portfolio has been declining, falling to less than 48 per cent of banks total advances, indicating a “reduction in concentration and diversification of borrowers”.
• Reduced bad loans — Bad loans of large borrowers have also declined to 7.7 per cent of advances at the end of March 2022.
• Caution — The continuous rise in the Special Mention Accounts – (SMA-0) and (SMA-1) categories (loans where the principal or interest payment is overdue for upto 30 days are characterised as SMA-0, while where they are due between 31 to 60 days are SMA-1) – requires close monitoring as per RBI.

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