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Highlights of Financial Stability Report

RBI Grade B

Overall assessment of systemic risks

  • India’s financial system remains stable.
  • Commodities space is firming up.
  • Increased geopolitical risks imply likely volatility in commodity prices.
  • Notwithstanding the efforts to normalise monetary policy by the Federal Reserve and the Bank of England, financial conditions in the advanced economies remain accommodative

Global and domestic macro-financial risks

  • Picking up Export. With picking up of global economy growth, in the emerging market, exports are growing at their fastest clip in six years on the back of a pick-up in global growth.
  • Structural changes: Information technology-led growth is possibly making the world a lot more unequal.
  • Rebounding Domestic growth in 2017-18:Q2 after initial hiccups due to GST and Demonetization
  • Investment climate ( factors may have +ve effect )
    • ‘the decline in number and cost of stalled projects in 2017-18:Q2’,
    • ‘the efforts to improve the quality of government expenditure’,
    • ‘ease of doing business ranking’,
    • ‘India’s sovereign rating upgrade by Moody’s’
    • ‘bank recapitalisation announcement’
  • Fund Flow
    • Large fund flow to both equity and debt mutual funds.
    • Foreign portfolio investment (FPI) flows into the capital market also remained buoyant with a greater preference for debt

Financial Institutions: Performance and risks

  • Risk banking sector remained elevated due to asset quality concerns

Credit Growth

  • Credit growth of scheduled commercial banks (SCBs) showed an improvement between March and September 2017,
  • Public sector banks (PSBs) continued to lag behind their private sector peers.
  • Gross non-performing advances (GNPA) ratio and the stressed advances ratio of the banking sector increased between March 2017 and September 2017
  • Stressed assets = NPAs + Restructured loans
  • Between March and September 2017, GNPA ratio of SCB increased from 9.6% to 10.2% and the stressed advances ratio marginally increased from 12.1% to 12.2%.
  • Public sector banks (PSBs) registered GNPA ratio at 13.5 per cent and stressed advances ratio at 16.2 per cent in September 2017.
  • Stress Test suggest that GNPAs ratio of the banking sector may rise from 2% in September 2017 to 10.8% in March 2018 and further to 11.1% by September 2018
  • Major contribution in GNPA is from industries. 2nd highest contributor i.e. Agriculture is no-where near to it.

Banks

  • Minning is the biggest contributer in NPA
  • Share of large borrowers both in total SCBs’ loans as well as GNPAs declined between March and September 2017.
  • GNPAs of the NBFC sector as a percentage of total advances increased between March 2017 and September 2017.
  • Stress loans to agriculture have risen since March 2017 indicating rural distress.

ROA

  • SCB’s ROA = 0.4% ( remained unchanged between March and September 2017)
  • PSB’s ROA = -ve

Capital to risk-weighted assets ratio (CRAR)

  • Improved from 13.6% to 13.9% between March 2017 and September 2017.

Degree of Interconnectedness

  • The network analysis indicates that the degree of interconnectedness in the banking system has decreased gradually since 2012.
  • The joint solvency-liquidity contagion analysis shows that the losses due to default of a bank have declined.
  • Banking Stability Index (BSI): “the expected number of banks that could become distressed given that at least one bank has become distressed”-> It has decreased.

Size in Financial System in term of bilateral exposure:

  • SCBs (47%) > AMC-MFs > NBFCs > insurance companies > HFCs > AIFIs

*AMC-MFs = Asset Management Companies Managing Mutual Funds; NBFCs =Non-Banking Financial Companies; HFCs – Housing Finance Companies and AIFIs= All-India Financial Institutions.

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