News:The Reserve Bank of India has released its biannual Financial Stability Report,2019.
About Financial Stability Report:
- The Financial Stability Report are bi-annual reports published by the Reserve Bank of India(RBI).
- The report is the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.
- It reviews the nature, magnitude and implications of risks that may have a bearing on the macroeconomic environment, financial institutions, markets and infrastructure.
Key takeaways from the report:
On India’s Economic Growth:
- The Reserve Bank has said that the country’s financial system remains stable despite slowing economic growth.
- The aggregate demand has slowed down in the second half of the current financial year ending March 2020 adding to an already slowing economic growth.
- The Global factors such as a delay in Brexit deal, trade tensions, impending recession, oil-market disruptions and geopolitical risks has caused uncertainties leading to a significant deceleration in growth.
- The reviving of the twin engines of India’s economic growth namely private consumption and investment while being vigilant about developments in global financial markets remain a critical challenge for RBI.
On Banking Sector:
- The Banks capital adequacy ratio has improved significantly after the recapitalisation of public sector banks(PSBs) by the government.
- Insolvency and Bankruptcy Code (IBC) has tackled the issue of bad loans which had slowed down the performance and growth of private, public-sector banks and even non-banks.
- RBI has also taken several policy measures to improve the condition of the financial system such as (a)introducing a liquidity management regime for NBFCs (b)improving the banks’ governance culture (c)resolution of stressed assets and (d)for the development of payment infrastructure.
- However,RBI expects the banks gross non-performing asset(GNPA) ratio to increase from 9.3% in September 2019 to 9.9% by September 2020.
- This is primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.
- Further,the frauds reported by the banks touched an all time high of around Rs 1.13 lakhs in the FY19.The frauds reported between 2001-18 accounted to 90% of the frauds registered in 2019 alone.
About Capital Adequacy Ratio(CAR):
- Capital Adequacy Ratio(CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.
- It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
- The risk weighted assets take into account (a)credit risk (b)market risk and (c)operational risk while deciding Capital Adequacy Ratio(CAR).