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- Recently, the RBI’s latest Financial Stability Report (FSR) indicated that India’s banks and non-bank lenders can withstand even the worst of macro-economic stress.
- RBI’s stress testing models have been criticised in the past for a significant upward bias.
Major Highlights of the report
Financial stability has been maintained.
- Domestic financial markets have remained stable and fully functional.
- The banking system is sound and well-capitalised.
- The non-banking financial sector has also withstood these challenges.
- Banks have enough capital to maintain the ratio above the minimum requirement till September 2023.
- The decline in the capital adequacy ratio was on account of higher risk-weighted assets as lending activity picked up recently.
- The decrease in slippages, increase in write-offs and an improvement in loan growth brought the gross non-performing assets (NPA) ratio of banks further down to a seven-year low of 5%.
- The net NPA ratio stood at a 10 year low of 1.3%.
- Banks will be able to maintain a common equity tier-I capital ratio above the minimum requirement of 8%.
- There is a 41% increase in the net profit of the banks and a 10% growth in net interest income (NII).
Challenges
- India along with other emerging economies is facing several risks of:
- Rising borrowing costs.
- Debt distress.
- Elevated levels of inflation.
- Volatile commodity prices.
- Currency depreciation.
- Capital outflows.
Way Forward
- Preserving macroeconomic stability in this challenging environment will require safeguarding the domestic economy and the financial system through actions that mitigate the build-up of vulnerabilities and help smooth financial market adjustments.
Source: FE
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