GIST OF SANSAD TV : Financial Stability Report (FSR)

Introduction:

The Reserve Bank of India has released the 26th edition of the Financial Stability Report (FSR), which 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.

Key points of the RBI’s financial stability Report December 2022:

• The global economy is facing formidable headwinds with recessionary risks looming large.
• The interplay of multiple shocks has resulted in tightened financial conditions and heightened volatility in financial markets.
• The Indian economy is confronting strong global headwinds. Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability.
• Buoyant demand for bank credit and early signs of a revival in investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks (SCBs).
• The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5.0 per cent and net non-performing assets (NNPA) have dropped to ten-year low of 1.3 per cent in September 2022.
• Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios.
• The system-level capital to risk weighted assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9 per cent, 14.0 per cent and 13.1 per cent, respectively.
• Stress tests for open-ended debt mutual funds showed no breach in limits pertaining to interest rate, credit and liquidity risks.
• Consolidated solvency ratio of both life and non-life insurance companies also remained above the prescribed minimum level.

Points from the discussion:

Key findings of the report:

• The findings of the stress tests, which are published in this issue of the FSR, show that, should they occur, even extremely severe stress circumstances, banks would be able to survive them.
• Credit risk macro stress tests show that SCBs would be able to meet the minimum capital requirements even in the most extreme stress scenarios.
• Under baseline, medium and severe stress scenarios, the system-level capital to risk-weighted assets ratio (CRAR) is anticipated to be 14.9%, 14.0%, and 13.1%, respectively, in September 2023.
• No constraints relating to interest rate, credit, and liquidity risks were breached, according to stress testing for open-ended debt mutual funds. Both life and non-life insurance companies’ combined solvency ratios continued to be higher than the required minimum.

Global Economic factors affecting India:

• 2008 Financial Crisis: The Global economic crisis of 2007-8 has still not been able to recover till now, which seems to be more than a decade.
• Pandemic era slowdown: Then the pandemic situation has crunched the economy across world. The general trend of the macroeconomic situation got affected.
• Russia Ukraine war: Later on the Russia-Ukraine war has disrupted the global supply chains and made the economy to suffer which can be seen till today.

Indicators for India:

• Higher Interest rates of Banks
• Inflation
• Higher export prices
• Liquidity crunch
• Unemployment

Way ahead for India:

• Derivatives products are risk for the global economy and must be taken care of.
• India is well aware of the economic situation and how to deal with the crisis.
• Backward looking patterns must be avoided
• Sample survey and analysis of recent past must be done and considered

Value addition:

What is RBI’s Financial Stability Report (FSR)?

• Objective: It 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.
• It is published biannually and includes contributions from all the financial sector regulators.

Gross non-performing asset (GNPA)

• Gross NPA stands for the Gross Non-Performing Assets.
• Gross NPA is the term used by commercial banks that refer to the sum of any unpaid debt, which is classified as non-performing loans.

Solvency Ratio

• A solvency ratio is a key metric used to measure an enterprise's ability to meet its debt and other obligations.

Capital to Risk (Weighted) Assets Ratio (CRAR)

• Capital to Risk (Weighted) Assets Ratio (CRAR) is also known as Capital adequacy Ratio, the ratio of a bank’s capital to its risk.
• The banking regulator tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
• Higher CRAR indicates a bank is better capitalized.
• The Capital to risk-weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
• The higher the CRAR of a bank the better capitalized it is.