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GS-III : Economic Issues Financial Market

01 January, 2023
5 Min Read

26th Financial Stability Report (FSR)

26th Financial Stability Report (FSR)

The Reserve Bank published the Financial Stability Report's 26th edition.
The report details the Sub-Committee of the Financial Stability and Development Council's (FSDC) collective assessment of threats to financial stability and the financial system's resilience.
India's banks and non-bank lenders are capable of withstanding even the worst macroeconomic stress, according to the RBI's most recent Financial Stability Report (FSR).
The RBI's stress testing models have historically come under fire for having a sizable upward bias.

Findings of the report:

The stability of the financial system is being strengthened and resilient by the sound balance sheets of the financial and non-financial sectors.
Improved asset quality, a return to profitability, robust capital, and liquidity buffers are contributing to rising demand for bank loans and early indications of a rebound in the investment cycle.
These advantages are assisting the financial system in coping with external spillovers, tightening global financial conditions, and excessive market volatility.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks continue to maintain excellent capital balances.
The ratios of Common Equity Tier 1 (CET1) and Capital to Risk-Weighted Assets (CRAR) for SCBs were 16% and 13%, respectively.
The nonbanking financial industry has also persevered in the face of these difficulties.
Until September 2023, banks will have adequate capital to keep their ratio over the minimum threshold.
Because loan activity has lately increased, there has been a reduction in the capital adequacy ratio as a result of increasing risk-weighted assets.
The gross non-performing assets (NPA) ratio of banks dropped further to a seven-year low of 5% as a result of a decline in slippages, an increase in write-offs, and an improvement in loan growth.
At 1.3%, the net NPA ratio was at a 10-year low.
Banks will be permitted to have their common equity tier-I capital ratio higher than the required 8% minimum level.
The banks' net profit has increased by 41%, and net interest income has increased by 10%.

Financial stability risks:

Exchange rate turbulence and the strengthening of the US dollar,
A rise in the price of crude oil,
Global slowing in growth,
Current account deficit widening and capital flight,
Inflationary pressures have increased, and
Geopolitical dangers related to the conflict between Russia and Ukraine

Way Forward

It will be necessary to protect the domestic economy and the financial system through measures that reduce the accumulation of vulnerabilities and facilitate smooth financial market changes in order to maintain macroeconomic stability in this difficult climate

Source: Financial Express

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