RBI Financial Stability Report (RBI FSR) – Key Things To Watch Out

rbi fsr

The Reserve Bank of India recently released its statutory Report on Trend and Progress of Banking in India 2015-16 (RTP). As per this report, during 2015-16 the performance of most emerging market economies (EMEs) was marked by severe domestic imbalances originating from economic slowdown and downturn in credit growth coupled with rising stress in corporate and financial sectors. India stood out in terms of higher economic growth although the banking sector was under pressure primarily on account of asset quality concerns.

Within the same period prescribed earlier, Scheduled Commercial Banks interest earnings and non-interest incomes were adversely affected, which headed to a more than 60% drop in net profits for the banking sector. Banks return on assets (RoA) and return on equity (RoE) showed a substantial weakening as compared to the previous year even as the public sector banks (PSBs) reported negative RoA.

On NBFC side, they registered a significantly higher credit growth during 2015-16 in comparison with credit growth of commercial banks. The asset quality of the NBFC sector has been declining since 2012 although the NPAs of NBFCs continued relatively lower than that of the banking sector.

Key things to watch out in FSR December 2016 is that global financial markets continue to face higher levels of uncertainty notwithstanding the resilience to the outcomes of Brexit referendum and the US election. A negative feedback loop arising from productivity and global trade slowdowns and rising protectionism is adding to the negative outlook on global recovery even as the uptick in US interest rates poses a significant risk to emerging market economies.

The measures such as transition to the goods and services tax (GST) and the withdrawal of legal tender status of specified bank notes (SBNs) or old notes of Rs 500 and Rs 1000 could potentially transform the domestic economy, notwithstanding some inconvenience to public and the momentary adverse impact on growth. While the financial performance of the corporate sector has improved in 2016-17, the risk of lower turnover remains. In the external sector, the narrowing of the current account deficit partly reflects the external spillovers in the form of sluggish trade growth. The decline in the flow of remittances is also a concern. Going ahead, capital flow, more than trade, is likely to influence the exchange rate.

On the scheduled commercial banks – performance and risk side, the banking stability indicator (BSI) shows that the risk to the banking sector remained higher due to continuous deterioration in asset quality, low profitability and liquidity. The GNPA (gross non-performing advances) ratio of SCBs increased to 9.1% in September 2016 from 7.8% in March 2016, pushing the overall stressed advances ratio to 12.3% from 11.5%. The large borrowers registered significant deterioration in their asset quality.

The degree of interconnectedness in the banking system measured by the connectivity ratio showed a declining trend. SCBs were the dominant players accounting for nearly 59% of the total bilateral exposures followed by NBFCs. On a net basis, asset management companies managing mutual funds. (AMC-MFs) followed by the insurance companies were the biggest fund providers in the system while NBFCs followed by SCBs were the biggest receivers of funds.

Source: RBI, EWAL Research

 

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