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The latest Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) in June 2023 reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council on risks to financial stability and the resilience of the financial system. The report highlights that the Indian economy and domestic financial system continue to show resilience, supported by strong macroeconomic fundamentals, despite the flux in the global economy amidst banking system fragility, geopolitical tensions, and elevated inflation.
Key highlights
Decline in Gross Non-Performing Assets (GNPA) Ratio: The FSR report highlights that the GNPA ratio of banks continued its downward trend, reaching a 10-year low of 3.9% in March 2023. This indicates an improvement in the quality of bank assets and a reduction in the proportion of loans that are classified as non-performing. A lower GNPA ratio is positive for the stability and resilience of the banking system.
Decrease in Net Non-Performing Assets (NNPA) Ratio: The NNPA ratio, which takes into account provisions made by banks, declined to 1.0% in March 2023. This signifies a significant improvement in the ability of banks to recover loans and manage credit risk. A lower NNPA ratio indicates a healthier financial system and reduced vulnerability to credit defaults.
Improved Provisioning Coverage Ratio (PCR): The PCR, which measures the extent to which banks have set aside provisions for potential loan losses, improved to 74.0% in March 2023 from 40.1% in June 2016. This indicates that banks have increased their provisioning buffers, enhancing their ability to absorb potential losses and strengthen their balance sheets. A higher PCR is crucial for maintaining financial stability and resilience.
Resilience of Banks under Stress Scenarios: The FSR report highlights the results of macro stress tests conducted on credit risk. These tests assess the ability of scheduled commercial banks (SCBs) to withstand severe stress scenarios. The report indicates that SCBs would be able
to meet the minimum capital requirements even under severe stress situations. This demonstrates the resilience of banks and their ability to withstand adverse economic conditions.
System-Level Capital Adequacy: The FSR report projects the system-level capital to risk-weighted assets ratio (CRAR) under different stress scenarios. In March 2024, the CRAR is projected at 16.1% under the baseline scenario, 14.7% under the medium stress scenario, and13.3% under the severe stress scenario. These projections indicate that the banking system has adequate capital buffers to absorb potential losses and maintain stability even in adverse situations.
Broad-Based Improvement in Asset Quality: The FSR report highlights that the improvement in asset quality of scheduled commercial banks has been broad-based, with a steady decline in the stressed advances ratio across all major sectors. This suggests that the improvement in loan quality is not limited to specific sectors, but rather a positive trend observed across various segments of the economy.
Overall, the latest FSR released by the RBI indicates positive developments in the Indian financial system, including a decline in non-performing assets, improved provisioning, and resilience of banks under stress scenarios. These factors contribute to the stability and strength of the banking system, which is crucial for supporting economic growth and financial wellbeing.
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