Financial Stability Report

Context:

Last week the Reserve Bank of India released its latest Financial Stability Report (or FSR).

About Financial Stability Report:

• It is published twice each year.
• The FSR is one of the most crucial documents on the Indian economy as it presents an assessment of the health of the financial system.
• As part of the FSR, the RBI also conducts “stress tests” to figure out what might happen to the health of the banking system if the broader economy worsens.
• Each FSR also contains the results of something called the Systemic Risk Surveys.

Objective of the report:

• the FSR looks at questions:
• do Indian banks (both public and private) have enough capital to run their operations?
• Are the levels of bad loans (or non-performing assets) within manageable limits?
• Are different sectors of the economy able to get credit (or new loans) for economic activity such as starting a new business or buying a new house or car?
• the FSR also allows the RBI to assess the macro-financial risks in the economy. 

Findings of the report:

• the FSR has found that the actual level of bad loans as of March 2021 is just 7.5%.
• However, the FSR is quick to point out that “macro-stress tests” for credit risk show that the GNPA ratio of Scheduled Commercial Banks “may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 .
• relief provided by the RBI in the past year — cheap credit, moratoriums and facilities to restructure existing loans — has contained the number of Indian firms that openly defaulted on their loan repayment.
• Macro economic risks depend upon the evolution of the virus (and its impact on the economy) and decision of central banks the world over (especially the RBI) to raise interest rates (to contain rising inflation) and wind up their cheap money policy.
• Providing excess regulatory relief might just help firms that don’t deserve to get it because they are inherently inefficient.