RBI Financial Stability Report 2021: What does the report say about Financial Stability, NPAs and Systematic Risk?

On 11 January 2021, the Reserve Bank of India (RBI) released the 22nd issue of the Financial Stability Report (FSR). The article underscores the highlights of the biannual report on the risks to financial stability.
Created On: Jan 13, 2021 13:43 IST
Modified On: Jan 13, 2021 13:55 IST
RBI Financial Stability Report 2021
RBI Financial Stability Report 2021

On 11 January 2021, the Reserve Bank of India (RBI) released the 22nd issue of the Financial Stability Report (FSR). The report is published biannually and reflects an assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the risks to financial stability.

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Highlights of the Financial Stability Report (FSR) 2021:

1- At the beginning of the ongoing COVID-19 pandemic, policy actions were focussed on mitigating the stress and getting life back on track. Now, after the ease of lockdown, the focus has shifted to support the recovery and safeguard the solvency of businesses and households.

2- The development of the COVID-19 vaccine has infused hopes in the people but the second wave of infections along with more virulent strains has heightened uncertainty, threatening to stall the fragile recovery.  

3- The Government and the regulators have introduced policy measures for the smooth functioning of the domestic markets and financial institutions. However, managing market volatility is challenging as there's a disconnect between certain segments of the financial sectors and the real economy has been accentuating both in India and globally. 

3- Bank credit growth has remained low-spirited, with the moderation being broad-based across bank groups.

4- Performance parameters of banks enhanced remarkably and was aided by regulatory dispensations which were extended in the view of the ongoing COVID-19 pandemic. 

5- The Capital to Risk-weighted Assets Ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8% in September 2020 from 14.7% in March 2020, while their Gross Non-Performing Asset (GNPA) ratio declined to 7.5% from 8.4%, and the Provision Coverage Ratio (PCR) improved to 72.4% from 66.2% in the said period.

6- Macro stress tests incorporating the first advance estimates of Gross Domestic Product (GDP) for the Fiscal Year 2020-21 was released on 7 January 2021. It indicates that the GNPA ratio of all SCBs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario and may escalate to 14.8% under a severe stress scenario. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.

7- The total bilateral exposures among entities in the financial system increased marginally during the quarter ended in September 2020. With the inter-bank market continuing to shrink and with a better capitalisation of banks, the contagion risk to the banking system under various scenarios declined in comparison with March 2020.

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RBI FSR 2021: Macro-Financial Risks

The FSR has been released at a time when the global economy is still recovering from the distress caused by the ongoing COVID-19 pandemic and its second wave along with more virulent strains. At the beginning of the ongoing COVID-19 pandemic, policy actions were focussed on mitigating the stress and getting life back on track. 

With the upliftment of the nationwide lockdown, the policy actions are now focussed on the focus has shifted to support the recovery and safeguard the solvency of businesses and households.

The development on the COVID-19 vaccine has infused hopes in the people but the second wave of infections along with more virulent strains have heightened uncertainty, threatening to stall the fragile recovery, impacting macroeconomic and financial prospects across Europe, the US and other countries.

RBI FSR 2021: Domestic Economy and Markets

The policy measures for the smooth functioning of the domestic markets and financial institutions were introduced by the Government. However, managing market volatility is challenging as there's a disconnect between certain segments of the financial sectors and the real economy has been accentuating both in India and globally. 

The credit flow to the manufacturing sector has been low-spirited when the output of the sector is emerging out of a prolonged contraction.

The focus has now shifted to supporting growth-- consumption and investment-- from the provision of liquidity. Although a recovery in economic activity is noted, however, the output remains below the pre-pandemic levels. 

The aim is to mitigate the impact of the ongoing COVID-19 pandemic and to enhance sustainable and inclusive growth with macroeconomic and financial stability.

Financial Institutions: Soundness and Resilience

Year-Over-Year bank credit growth has declined. It was 5.7% in FY 2019-20 and remained sluggish. The bank deposit growth has remained robust in double digits. This reflects precautionary savings in the face of high uncertainty amid the pandemic. 

Return on Assets (RoA) and Return on Equity (RoE) for Scheduled Commercial Banks (SCBs) have improved and the Capital to Risk-weighted Assets Ratio (CRAR) of SCBs improved by 110 bps i.e., 15.8% in September 2020 from 14.7% in March 2020, Gross Non-Performing Asset (GNPA) ratio declined to 7.5% from 8.4% and Net Non-Performing Asset (NNPA) declined to 2.1%. The Provision Coverage Ratio (PCR) improved to 72.4% from 66.2% in the said period.

The above-mentioned improvements were aided by regulatory dispensations which were extended in the view of the ongoing COVID-19 pandemic. 

Macro stress tests for the Fiscal Year 2020-21 indicates that the GNPA ratio of all SCBs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario and may escalate to 14.8% under a severe stress scenario. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.

The Capital to Risk-weighted Assets Ratio (CRAR) of the Scheduled Urban Co-operative Banks (SUCBs) declined from 9.70% to 9.24% between March and September 2020. Non-Banking Financial Companies (NBFCs) credit grew at a tepid pace of 4.4% on an annual Year-Over-Year basis in comparison with the growth of 22% a year ago. 

The FSR stated, "The total outstanding bilateral exposures among constituents of the financial system grew marginally after witnessing a sharp fall as at end-June 2020. SCBs continued to have the largest bilateral exposure in the Indian financial system in September 2020. As regards inter-sectoral exposures, asset management companies/mutual funds (AMC-MFs), followed by insurance companies, remained the most dominant fund providers in the system, while NBFCs were the biggest receiver of funds, followed by housing finance companies (HFCs)."

RBI FSR 2021: Regulatory Initiatives and Other Developments in the Financial Sector

The Government and the regulators have taken several measures to mitigate the stress of the COVID-19 pandemic. These extraordinary measures aimed at easing balance sheet stress for borrowers and lending institutions. Additionally, continuing efforts are made to bridge the systematic gaps, to develop and strengthen various segments of the financial system.

Assessment of Systemic Risk in RBI FSR 2021

In the latest survey on Systematic Risk Survey (SRS), respondents rated institutional risks as 'high', comprising of asset quality deterioration, additional capital requirements, level of credit growth and cyber risk, among others. Other major risk groups such as global risks, macroeconomic risks and financial market risks were rated 'medium'.

The latest survey report underscores the shift from the April/May 2020 survey results in which all the above groups were rated as 'high' risk.

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Reserve Bank of India (RBI) Governor Shaktikanta Das in the Foreward of the report stated that maintaining the health of the banking sector remains a policy priority and preservation of the stability of the financial system is an overarching goal.

He further stated that the IT platforms and the digital payments have provided appreciable support in the smooth functioning and business continuity amid the ongoing COVID-19 pandemic. However, more investment is need from the stakeholders for creating robust IT platforms and technologies for operational purposes and fortifying public confidence in digital banking. He termed digital technologies as a 'bright spot' in the country's economic prospects. 

Thus, for a better post-COVID-19 world in terms of economic growth and livelihood, financial stability is of utmost importance.  

Source: RBI

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FAQ

Who is the current Governor of RBI?

The current Governor of the Reserve Bank of India is Shaktikanta Das.

What does the latest survey on Systematic Risk indicates?

The latest survey on Systematic Risk Survey (SRS) indicates institutional risks as 'high', comprising of asset quality deterioration, additional capital requirements, level of credit growth and cyber risk, among others. Other major risk groups such as global risks, macroeconomic risks and financial market risks as 'medium'.

What are the highlights of the Financial Stability Report 2021 by RBI?

The highlights of the Financial Stability Report 2021 are as follows: 1- The Capital to Risk-weighted Assets Ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8% in September 2020 from 14.7% in March 2020, while their Gross Non-Performing Asset (GNPA) ratio declined to 7.5% from 8.4%, and the Provision Coverage Ratio (PCR) improved to 72.4% from 66.2% in the said period. 2- The first advance estimates of Gross Domestic Product (GDP) for the Fiscal Year 2020-21 indicates that the GNPA ratio of all SCBs may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario and may escalate to 14.8% under a severe stress scenario. 3- The Capital to Risk-weighted Assets Ratio (CRAR) of the Scheduled Urban Co-operative Banks (SUCBs) declined from 9.70% to 9.24% between March and September 2020. Non-Banking Financial Companies (NBFCs) credit grew at a tepid pace of 4.4% on an annual Year-Over-Year basis in comparison with the growth of 22% a year ago.

Why is Financial Stability Important?

For a better world in terms of economic growth and livelihood, financial stability is of utmost importance.

What is the Financial Stability Report 2021 by RBI?

On 11 January 2021, the Reserve Bank of India (RBI) released the 22nd issue of the Financial Stability Report (FSR). It highlights the risks to financial stability.
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