RBI’s Financial Stability Report (FSR)

  • June 29, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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RBI’s Financial Stability Report (FSR)

Subject :Economy

Section: Monetary Policy

Key points:

  • RBI’s Financial Stability Report (FSR), in its assesment found the banking system and the economy resilient, despite challenging global macroeconomic outlook.
  • The report examines the key indicators of banking health and uses stress test models to project the change in the various indicators subject to the possible scenarios of economic stress. Stress meaning adverse situation such as higher interest rates, increase in bad loans, or economic slowdown.
  • Gross non performing assets (GNPA) ratio of the banks continued its down trend and fell to a 10 year low of 9 % in march this year and the Net NPA ratio declined to 1%. The GNPA
    • may improve to 3.6 % by March 2024 under the baseline scenario
    • may rise to 4.1 % if the macroeconomic environment worsens to a medium scenario
    • may rise to 5.1 % in event of severe stress scenario.
  • Scheduled commercial banks (SCBs) are well capitalised and capable of absorbing macro economic shocks over a one year horizon even in the absence of any further capital infusion, showed stress tests by the Reserve Bank of India.
  • Aggregate Capital to Risk Weighted Assets Ratio (CRAR) of 46 major banks is projected to slip from 17% in March 2023, though will remaine above the minimum capital require ment, including the capital conservation buffer (CCB) of 11.5 %. The possible decrease as per stress scenario is as follows:
    • 1 % by March 2024 in baseline scenario
    • may go down to 14.7 % in the medium stress scenario and
    • to 13.3 % under the severe stress scenario.
  • Despite the recent step up in bank credit growth, India’s credit to GDP ratio is still lower than it was in March 2013, reflecting still muted credit absorption relative to advanced and emerging mar ket peers,
The Financial Stability Report (FSR) reflects the collective assessment of the subcommittee of the Financial Stability and Development Council (FSDC SC) on the current and emerging vulnerabilities of the Indian financial system.

Stress tests assess the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment.

Gross NPA refers to the entire amount of debts that an organization has not collected or the individuals owing the organization has not fulfilled their contractual obligations to pay both the amount of principal and interest.

Net non-performing assets is the amount resulting from the sum of the defaulted loans after deducting provision for uncertain and unpaid debts. It is the real loss that the organization incurs after defaulted loans.

Credit to GDP Ratio is an important measure of the strength and health of the financial system. Its value depends on the development of financial markets, the savings rate and investment climate among other things. India’s domestic credit to the private sector at 55% of GDP in 2020 is remarkably below the world average (148%), and lowest among its Asian peers — China (182%), South Korea (165%), and Vietnam (148%).

The credit-to-GDP Gap is defined as the difference between the credit-to-GDP ratio and its long-run trend, and captures the shortfall in credit offtake or build-up of excessive credit in a reduced form fashion. Basel III uses the gap between the credit-to-GDP ratio and its long-term trend as a guide for setting countercyclical capital buffers.

The capital-to-risk weighted assets ratio, also known as the capital adequacy ratio, is one of the most important financial ratios used by investors and analysts. The ratio measures a bank’s financial stability by measuring its available capital as a percentage of its risk-weighted credit exposure

economy RBI’s Financial Stability Report (FSR)