15 Jul Financial Stability Report – An analysis of the financial system in India
Financial Stability Report – An analysis of the financial system in India – Today Current Affairs
Financial stability may be disturbed by processes from both – inside and outside of the financial sector leading to the emergence of weak spots like excessive leverage; dealing in doubtful products like collateralized debt securities (CDS), regulatory lapses and inadequate safeguards prescribed by law and other.
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How Indian banks survive the financial crisis?
- Indian banks are well-regulated through proper supervision.
- They are well capitalized through capital adequacy ratio according to BIS.
- Calibrated globalization.
Post-Lehman : The Hindu Analysis
Maintaining and monitoring financial stability has always been a key objective of monetary policy. However, it was only from 2008 crisis that the government and the RBI sought to institutionalise the process.
RBI tracks the following parameters to maintain financial stability : The Hindu Analysis
- Excessive volatility in interest rates.
- Exchange rates.
- Asset prices.
- Signs of excess leverage (borrowings) in the financial sector by Companies and households.
- The unregulated parts of the financial sector.
Reserve Bank of India (RBI) released its bi-annual Financial Stability Report (FSR) : The Hindu Analysis
- On NPA: The gross non-performing assets (GNPA) ratio declining from 7.4 per cent in March 2021 to a six-year low of 5.9 per cent in March 2022 due to recoveries, write-offs and reduction in slippages.
- Provisioning coverage ratio (PCR): It improved to70. 9 per cent in March 2022 from 67.6 per cent a year ago.
- Banks, as well as non-banking financial institutions, have sufficient capital buffers to withstand shocks, and support from it during Covid helped banks arrest their GNPA ratio.
About Provisioning coverage ratio (PCR) : The Hindu Analysis
It is the portion of money a bank reserves for losses brought on by bad loans. For banks to protect themselves from losses if the NPAs start rising more quickly, a high PCR can be advantageous.
Concerns Raised : The Hindu Analysis
- Global spillover: US rate increase and the threat of recession; Ukrain crisis; Oil price rise.
- It has exposed the banking system to new risks such as safeguarding of data privacy, cyber security, consumer protection, competition and compliance with AML (anti-money laundering) policies.
- The Indian fintech industry —is amongst the fastest growing Fintech markets in the world. The Hindu Analysis
- India has the highest fintech adoption rate globally (87 per cent).
- Risk from BigTechs (big technology firms):
- They can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions.
- Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour.
- Cryptocurrencies are termed as a “clear danger” and anything that derives value based on make-believe, without any underlying, is just “speculation under a sophisticated name”.
Thus, financial stability report gives a glimpse about the financial stability of the Indian economic system highlighting the measures that could be taken by the government and Reserve Bank of India (RBI) to ensure that the Indian economic system doesn’t face the instability akin to 2008 crisis situation.