Why RBI Financial Stability Report is in the news?

Why RBI Financial Stability Report is in the news?

Recently, the Reserve Bank of India has released its Financial Stability Report.

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Key Highlights of Financial Stability Report:

The GNPA Ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021.
It warned that the gross non-performing assets (GNPA) ratio of all scheduled commercial banks could rise to 14.7 per cent under very severe stress.
Under the baseline scenarios, state-run banks’ GNPA ratio may increase to 15.2 per cent by March 2021 from 11.3 per cent in March 2020.
The GNPA ratio of private banks and foreign banks may increase from 4.2 per cent and 2.3 per cent to 7.3 per cent and 3.9 per cent, respectively, over the same period.
The system level CRAR is projected to drop from 14.6 per cent in March 2020 to 13.3 per cent in March 2021 under the baseline scenario and to 11.8 per cent under the very severe stress scenario.
The stress test results indicated that five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario.
The common equity tier I (CET 1) capital ratio of banks may decline from 11.7 per cent in March 2020 to 10.7 per cent under the baseline scenario and to 9.4 per cent under the very severe stress scenario in March 2021.

Reasons for Stress in Financial Sector

The regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of banks.
The industry-wise composition of good quality loans of state-run banks and private banks reveals that some of the industries with higher share of such loans across bank groups are severely affected by the COVID-19 crisis.
The profitability ratios of banks, although better in FY20 compared to FY19, have declined in the second half of FY20 and the outlook is weighed down by the moratorium’s implications for loan classification.
A liquidity risk analysis was done to capture the impact of a possible run on deposits and increased demand for unutilised portions of sanctioned / committed/guaranteed credit lines.

Impact of Stress in Financial Sector

There would be increased withdrawals of un-insured deposits.
There is a possibility of simultaneous increase in usage of the unutilised portions of sanctioned working capital limits.
There would be utilisation of credit commitments and guarantees extended by banks to their customers.
If the condition of the banks’ loan book deteriorates further, it will affect the capital buffer and make it difficult for banks to lend to companies at the time of need.

Way Forward

The financial sector stability is a prerequisite for giving confidence to businesses, investors and consumers and we need to remain extremely watchful and focused.
There is a need for financial intermediaries to proactively augment capital and improve their resilience.
The governments, central banks and other public agencies across countries need to have coordinated efforts to alleviate financial stress and build confidence.
The financial intermediaries are required to undertake a reappraisal of their business models.
The period of social distancing, information technology platforms have worked well and these gains need to be consolidated.