The Financial Stability Report (FSR) published by the Reserve Bank of India includes contributions from all the financial sector regulators. The report reflects the Indian economic condition, soundness of financial institutions and regulatory Initiatives and developments in the Financial Sector. The main theme of the report seems to be an assertion of “overall resilience of Indian financial institutions” amidst the current dynamic and the uncertain macroeconomic situation. Indian FIs have managed to, so far, navigate the waves of the COVID-19 pandemic and displayed superior risk absorption capacity. The report points out that the financial stability risks to the Indian economy are skewed towards external factors more than domestic ones. Additionally, the report describes some emerging risks to financial stability emanate from cryptocurrencies (although limited) and cyber risks that requires special attention.
Highlights of the report includes:
Indian economy: The high-frequency indicators point to a gradual but unevenly strengthening recovery of the Indian economy in the first quarter of 2022-23, in spite of high inflationary pressure,geopolitical situation and global spillovers. Retail inflation stood at 7.04% in May, easing from a near-eight-year high of 7.79% in the previous month. Inflation, however, has remained above the RBI’s medium-term target of 4% for 32 consecutive months.
Soundness of financial Institutions: The Indian banking system is well-positioned to assist the economic growth with the support of adequate capital buffers and improving asset quality levels. The bank’s credit growth is clocking double digits and the gross non-performing assets (GNPA) ratio fell to a six-year low of 5.9%. The support measures provided by the regulator during the COVID-19 pandemic aided in arresting GNPA ratios of Scheduled Commercial Banks (SCBs) even with the winding down of regulatory reliefs.
The bad loans of the banks are expected to decline to 5.3 % of total advances by March 2023 from a six-year low due to growth in credit and declining trend in NPAs. In July this year, National Asset Reconstruction Company (NARCL) or bad bank is expected to take over the first set of non-performing accounts amounting to Rs 6,000 crore.
The capital to risk-weighted assets ratio (CRAR) of SCBs, which has been on a rise since March 2020, rose to a new high of 16.7% in March 2022. The Non-banking financial companies (NBFCs) also have sufficient capital buffers to withstand the economic shocks. Financial markets, on the other hand, are witnessing heightened volatility due to y foreign portfolio investment outflows and the sharp appreciation of the US dollar.
Regulatory Initiatives and developments in the Financial Sector: As per the report strengthening the regulation of non- bank financial intermediation remains a priority. The report addressed the concern of financial stability, governance and legislative issues due to the presence of BigTech in financial services. They increase financial stability risks by bundling several financial activities through their platforms. Their rising operational interconnectedness with financial incumbents through outsourcing partnerships also enhances risks to financial stability. The risk associated with the complex governing structure of BigTech was also highlighted. The report examined the vulnerabilities associated with unbacked crypto-assets (such as Bitcoin), stablecoins and decentralised finance (DeFi); and crypto-asset trading platforms (exchanges). It also addressed thedevelopments in the crypto ecosystem and the broader role of technology in financial services are also receiving increased attention.
According to the Financial stability report the number of demat accounts of individuals increased 3.4 times on CDSL and 1.5 times on NSDL since January 2020. RBI said that the decline in real returns on fixed income investments, simplification of Know Your Customer (KYC) registration process, effective use of digital technology and opening of online accounts, enhanced availability of investment information on digital modes and growing public awareness has promoted a widening of t
Private sector banks increased market share in MSME lending
The Private sector banks are grabbing market share in the MSME lending aggressively as the PSU banks remain muted. According to RBI’s financial stability report the number of fresh borrowers at 67.61 lakhs for private sector banks under the government’s ECLGS scheme is three times the fresh borrowers attracted by public sector banks who managed only 22.65 lakh new borrowers. Private banks disbursed Rs 95,700 crore compared to Rs 79,800 crore disbursed by public sector banks.
According to a report by credit bureau CRIF Highmark the market share by originations value of private banks significantly increased from 33.6% in FY20 to 69.8% in FY22 and the market share by originations volume climbed from 26.9% in FY20 to 33.5% in FY22. As per RBI report the increase in domestic demand and pick up in ancillary industries and service units has increased the funding requirement of this sector.
Digital Payment strong presence in the month of June, 2022
Digital payments continued to remain strong in June with the Unified Payments Interface (UPI) clocking transactions worth over ₹10-lakh crore last month. According to the data from the National Payments Corporation of India (NPCI), UPI processed 586 crore transactions amounting to ₹10.14 lakh crore in June this year, while in May UPI processed 595 crore payments worth ₹10.41 lakh crore. On the other hand on a year -on- year basis the UPI transaction has doubled from 280.75 crore amounting to ₹5.47 lakh crore.
The government will establish the Financial Services Institutions Bureau (FSIB) as a single entity for making recommendations for appointments of whole time directors and non-executive chairman of banks and financial institutions. The Appointments Committee of the Cabinet has asked the Department of Financial Services to carry out necessary modifications in the Nationalised Banks Scheme with the approval of the finance minister to effect this change.
Rating agency Crisil has lowered India’s real gross domestic product (GDP) growth forecast to 7.3% from 7.8% for FY23. The fall was due to high commodity prices, elevated freight prices, drag on exports as global growth projections get lowered, and the largest demand-side driver of private consumption remains weak. The report also highlighted that the rupee- dollar exchange will remain volatile due to a widening trade deficit, foreign portfolio investment (FPI) outflows and strengthening of the US dollar index.
