Financial Stability Report

Subject: Economy

Context:

Reserve Bank of India (RBI)has  released its Financial Stability Report which 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.

Findings:

• Gross nonperforming assets (GNPA) ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021.
• In the case of public sector banks, the GNPA ratio of 11.3 per cent as of March 2020 might elevate to 15.2 per cent by March 2021
• The capital to risk-weighted assets ratio (CRAR) of banks edged down to 14.8 per cent in March 2020 from 15 per cent in September 2019.
• At the same time, the provision coverage ratio (PCR) improved to 65.4 per cent from 61.6 per cent over this period.

Concept:

Scheduled commercial banks

• By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is considered a scheduled bank.
• The list includes the State Bank of India and its subsidiaries, all nationalised banks, regional rural banks (RRBs), foreign banks and some co-operative banks.
• These also include private sector banks, both classified as old and new.
• To qualify as a scheduled bank, the paid up capital and collected funds of the bank must not be less than Rs 5 lakh.
• Scheduled banks are eligible for loans from the Reserve Bank of India at bank rate, and are given membership to clearing houses.

Capital to risk-weighted assets ratio

• Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.
• It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
• Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets
• The risk weighted assets take into account credit risk, market risk and operational risk.
• The Basel III norms stipulated a capital to risk weighted assets of 8%.
• However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.