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RBI’s role as apex financial institution

  • Category
    Economy
  • Published
    4th Nov, 2019

The banking system is crucial in India’s economy, and their poor state of health today, is further exacerbating the slump in economic activity across the country.

Issue

Context
The banking system is crucial in India’s economy, and their poor state of health today, is further exacerbating the slump in economic activity across the country. In this context it is important to assess the role of the Reserve Bank of India (RBI) as the apex financial institution.

Background

  • Credit growth has fallen sharply in recent months as banks have become wary of lending; even firms have become reluctant to undertake new projects.
  • Capital adequacy for Indian banks is Capital buffers of India’s banking system are among the lowest among the G-20 economies.
  • Meanwhile, the troubles in the shadow banking sector threaten the health of the banking system, and may prolong a deep financial slump. It could result in a spike in bad loans for conventional banks which fund the shadow banks.
  • The ‘domestic savings rate’ is low. There is sharp decline in the ‘net savings rate of households’, which have borrowed to maintain consumption levels in period of weak income growth. There is growing dependence on foreign capital inflows to fund the Indian commercial sector.
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