Financial Stability Report: RBI

• 28 Dec 2019

Why in News

The Reserve Bank of India has released the 20^th issue of the Financial Stability Report (FSR).

• The FSR 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.
• The Report also discusses issues relating to development and regulation of the financial sector.

Key Points

• Credit Growth
  
  • Bank credit is the total amount of funds a person or business can borrow from a bank.
  • Scheduled Commercial Banks’ (SCBs) credit growth remained subdued at 8.7% year-on-year (y-o-y) in September 2019, down from 13.2% in March 2019.
  • Private Sector Banks (PVBs) registered double digit credit growth of 16.5% in September 2019.
• Expected Increase in Gross Non-Performing Asset (GNPA) Ratio
  
  • SCB’s Gross Non-Performing Asset (GNPA) ratio of banks may increase to 9.9% by September 2020 from 9.3% in September 2019.
  • Public Sector Banks’ (PSB) GNPA ratios may increase to 13.2% by September 2020 from 12.7% in September 2019.
  • For private banks, the ratio may climb to 4.2% from 3.9%, under the stress scenario.
  • Foreign banks’ (FB) GNPA ratio may increase to 3.1% from 2.9% in September 2019.

• Non-Performing Asset
  
  • Non-Performing Assets (NPA) refer to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest.
  • 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 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 are the amount that is realized after provision amount has been deducted from the gross non-performing assets.

• All banks’ Capital to Risk-weighted Assets Ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019, following the recapitalisation of PSBs by the government.
  
  • CRAR is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. It is also known as the Capital Adequacy Ratio (CAR).
  • CAR = (Tier 1 Capital + Tier 2 Capital)/Risk weighted Assets
  • Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and audited revenue reserves. Tier-1 capital is the capital that is permanently and easily available to cushion losses suffered by a bank without it being required to stop operating.
  • Tier-2 capital comprises unaudited retained earnings, unaudited reserves and general loss reserves. This capital absorbs losses in the event of a company winding up or liquidating
• Provision Coverage Ratio (PCR) of all SCBs rose to 61.5% in September 2019 from 60.5% in March 2019 implying increased resilience of the banking sector.
  
  • Provisioning Coverage Ratio (PCR) refers to the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans.

Way Forward

• The global economy confronted a number of uncertainties – a delay in the Brexit deal, trade tensions, oil-market disruptions and geopolitical risks – leading to significant deceleration in growth.
• As regards the domestic economy, aggregate demand slackened in second quarter of 2019-20 further extending the growth deceleration.
• Reviving the twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge going forward.

Source: TH