02 Jan Financial Stability Report by RBI
Financial Stability Report: by RBI
This article covers “Daily Current Affairs for UPSC” and topic is the “Financial stability report” which is in news, It covers “Indian Economy and related issues” In GS-3, and the following content has relevance for UPSC.
For prelims: About Financial stability report
For mains: GS -3, Indian Economy and related issues
Why in News:
Recently, RBI released financial stability report.
Major Findings of the Financial Stability Report
- Prospects for the world economy: Due to the European conflict, the front-loaded normalization of monetary policy by central banks in reaction to chronically rising inflation, and the several COVID-19 pandemic waves, it is veiled in a great deal of uncertainty.
- A route to recovery: The Indian economy is still recovering despite the difficulties caused by global spillovers, but inflationary pressures, foreign spillovers, and geopolitical threats need to be handled carefully and closely watched.
- Capital buffers: Financial institutions, including banks and non-banking, have enough capital buffers to withstand shocks.
Scheduled Commercial Banks’ (SCBs’) capital-to-risk-weighted assets ratio (CRAR) increased to a new high of 16.7% while their gross non-performing asset (GNPA) ratio dropped to a six-year low of 5.9% in March 2022. Banks now have the resources necessary to write off the majority of their problematic loans thanks to several waves of recapitalization.
Even more significantly, NPAs for industrial lending has dropped from 23% to 8.4%.
Even with these significant write-offs, the majority of banks still have adequate capital.
- Macro stress testing for credit risk has shown that SCBs would be able to meet the minimum capital requirements even under very stressful circumstances.
- Broad averages mask a troubling picture, raising concerns about how bank credit will sustain GDP growth.
- The issue is that not much of this credit is being used to finance investments or large-scale industries.
- Reduced bank credit: Banks have gradually turned away from lending to industry over the past ten years in favor of lending to households.
- As a result, consumer loans have climbed from 19% to 29% of total banking credit, while the share of industry credit has decreased from 43% in 2010 to 30% in 2020.
- High NPA concentrations: Within a short period of time, credit doubled, largely as a result of funding for significant infrastructure projects.
- Many of those loans later went bad, resulting in significant NPAs on bank balance sheets.
- Further basic issues: As of yet, there is no framework in place to lessen the risk associated with private sector investments in infrastructure, especially not in the crucial and seriously problematic power industry.
- The financial system received a largely unblemished report card from the report.
- Given the strain of the previous ten years, the pandemic’s shock, and the ensuing economic slump, this performance is noteworthy.
- The improvement in banks’ financials is a “glass half-full” scenario, nevertheless.
- It is yet unknown if the financial sector is strong enough to support the steady rise in credit required for a robust economic recovery.
- The financial sector’s reach has been aided by technology, and its advantages must be fully realized.
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