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Financial Stability Report (FSR)- Jan 2022

  • IAS NEXT, Lucknow
  • 12, Jan 2022
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Recently, the Reserve Bank of India (RBI) released its latest Financial Stability Report (FSR). 

What is the significance of Financial Stability Report (FSR)?

  • FSR is published twice each year by the RBI that presents an assessment of the health of the financial system.
  • The RBI also conducts a Systemic Risk Survey (SRS), wherein it asks experts and market participants to assess the financial system on five different types of risks 
    • Global
    • Financial
    • Macroeconomic
    • Institutional
    • General
  • FSR details the current status of different financial institutions such as all the different types of banks and non-banking lending institutions. 
  • It also maps the state of credit growth and the rate at which borrowers are defaulting on paying back loans.
  • Reading the FSR tells us how robust or vulnerable our financial system — especially our banking system — is to the changes in the economy. 
  • As a corollary, it also tells us whether and to what extent will our banks and other lending institutions (such as Non-Banking Finance Companies and Housing Finances Companies) be able to support future growth.

What are the important takeaways from the recently released FSR?

Since this is a biannual publication, the default comparison is to the last FSR.

  1. Global growth has started to falter
  • Since the July 2021 issue of the FSR, the rejuvenation of the global recovery in the first half of 2021 has started losing momentum, impacted by
    • Resurgence of infections in several parts of the world
    • Supply disruptions and bottlenecks 
    • Persistent inflationary pressures 
  • The Goods Trade Barometer of the WTO shows that the World merchandise trade volumes, which had risen 22.4% year-on-year in Q2 of 2021, have been slowing in the second half of the year. 
  • The Baltic Dry Index, which is a measure of shipping charges for dry bulk commodities, crossed its highest mark in more than a decade in October 2021, but it recorded a sudden drop after that. 
  • The Global Economic Surprise Index (GESI), which compares incoming data with economists’ forecasts to capture the surprise element, went into negative territory during Q3 of 2021.
  • The slowdown in activity is occurring even in countries with relatively high vaccination rates
  • Disconnect between real economy and India’s equity markets 
  • Lifted by the bull run in equity markets across the globe, the Indian equity market surged and strong investor interest has driven up price-earnings (P/E) ratios substantially.
  • Bank credit growth is improving, but not fast enough
  • The banking stability indicator (BSI), which indicates the changes in underlying conditions and risk factors of India’s commercial banks, showed improvement in soundness, asset quality, liquidity and profitability parameters.
  • There is an improvement in the credit growth rate as it forms a “U-shaped” recovery but still there are some matters of concern. 
    • The growth rate is still far off the ideal level. 
    • Retail credit (less than Rs 5 crore) is growing at a decent clip but the wholesale credit (Rs 5 crore and above) growth continues to struggle. 
    • Most of the wholesale credit is being picked up by public sector undertakings while the private sector is holding back from raising fresh funding.
  • Non Performing Assets (NPAs) may rise by September 2022

The latest FSR pegs the NPA of India’s Scheduled Commercial Banks (SCBs) at 6.9% at September 2021.

  • Stress tests indicate that the Gross NPA ratio of all SCBs may increase to 8.1% by September 2022 under the baseline scenario and further to 9.5% under severe stress.
  • Within the bank groups, public sector banks’ GNPA ratio of 8.8% in September 2021 may deteriorate to 10.5% by September 2022 under the baseline scenario.
  • Banking prospects improve
  • Almost 64% of respondents expect the economy to recover fully in the next 1-2 years while 22% believe it may take up to 3 years.
  • The latest FSR’s analysis suggests that India’s banking and financial system has largely improved since the July 2021 report.
  • But with global growth faltering, monetary tightening in the developed countries as well as the rise of omicron, the risks are evenly balanced.