RBI releases the Financial Stability Report, December 2023

Summary:

The Reserve Bank of India recently released the 28th issue of the Financial Stability Report (FSR), which provides an assessment of the risks to financial stability and the resilience of the Indian financial system. The report highlights that the global economy is facing multiple challenges, including slowing growth, large public debt, increasing economic fragmentation, and prolonging geopolitical conflicts. However, the Indian economy and domestic financial system remain resilient, supported by strong macroeconomic fundamentals, healthy balance sheets of financial institutions, moderating inflation, improving external sector position, and continuing fiscal consolidation.

The report provides a snapshot of the Indian banking sector’s financial health. The capital to risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) ratio of scheduled commercial banks (SCBs) stood at 16.8% and 13.7% respectively, in September 2023. The gross non-performing assets (GNPA) ratio of these banks continued to decline to a multi-year low of 3.2% and the net non-performing assets (NNPA) ratio to 0.8% in September 2023.

The report also subjected the banking sector to macro stress tests for credit risk, which reveal that SCBs would be able to comply with minimum capital requirements, even under severe stress scenarios. The system-level CRAR is projected to be 14.8%, 13.5%, and 12.2% respectively under the baseline, medium, and severe stress scenarios.

The non-banking financial companies (NBFCs) sector is also showing signs of resilience, with a CRAR of 27.6%, GNPA ratio of 4.6%, and return on assets (RoA) of 2.9%, in September 2023. These figures suggest that the NBFCs sector has improved its resilience.

Overall, the report highlights that the Indian financial system is well-equipped to navigate the challenges posed by the global economy, and that the banking and NBFCs sectors are demonstrating resilience and stability.