GS Paper III

News excerpt:

The Reserve Bank released the 28th issue of the Financial Stability Report (FSR).

Highlights of the report: The report 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 Indian financial system. 

Details of the report are as follow:

• The global economy faces multiple challenges:
•   Prospects of slowing growth
•   Large public debt
•   Increasing economic fragmentation
•   Prolonging geopolitical conflicts
•  The Indian economy and the domestic financial system remain resilient, supported by:
• Strong macroeconomic fundamentals.
• Healthy balance sheets of financial institutions.
• Moderating inflation.
• Improving external sector position.
•  Continuing fiscal consolidation.
•  CRAR  & CET1 ratio
•  The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of scheduled commercial banks (SCBs) stood at 16.8% and 13.7% , respectively, in September 2023.
• According to the report, the increase in risk weights addresses growth exuberance among lenders. Risk weights for NBFCs’ unsecured loans were also increased.
• Banks and NBFCs will be required to allocate higher capital for unsecured retail loans, 
• Which will improve their loss-absorbing buffers.
• It will dampen growth exuberance among lenders and improve credit quality.
• SCBs’ gross non-performing assets (GNPA) ratio continued to decline to a multi-year low of 3.2 % and the net NNPA ratio to 0.8% in September 2023.
• Macro stress tests for credit risk reveal that SCBs would be able to comply with minimum capital requirements, with the system-level CRAR in September 2024 projected at 14.8 %, 13.5 % and 12.2 % , respectively, under baseline, medium and severe stress scenarios.
• The resilience of the non-banking financial companies (NBFCs) sector improved with CRAR at 27.6 per cent, GNPA ratio at 4.6 percent and return on assets (RoA) at 2.9 percent, respectively, in September 2023.