The 22nd issue of the Financial Stability Report (FSR report) was issued by the Reserve Bank of India (RBI) on 11 January 2021. The report is released twice yearly and represents the evaluation of threats to financial stability by the Sub-Committee of the Financial Stability and Development Council (FSDC).
Read this article with full dedication as it contains an important 2021 topic that can be asked in your upcoming UPSC CSE Exam. Read it till the end to know everything about the global financial stability report and RBI financial stability report.
Things to Know about the RBI
The Reserve Bank is owned and controlled and run by the Government of India.
The Preamble to the Reserve Bank of India defines the core functions of the Reserve Bank as:
- Regulation of the issue of banknotes.
- Securing currency equilibrium in India.
- Modernizing the monetary policy system to solve global problems.
The activities of the Reserve Bank are controlled by the Central Board of Directors, while RBI functions as a whole with a 21-member Central Board of Directors constituted by the Government of India in compliance with the Indian Reserve Bank Act.
The Central Board of Directors shall be composed of:
- Official Directors: The Governor authorised for a term of four years, together with 4 Deputy Governors.
- Non-Official Directors: 10 directors from diverse fields and 2 government officials.
Objectives of the RBI
RBI’s key goals are to manage and enforce financial sector policies consisting of financial institutions, commercial banks and non-banking financial companies (NBFCs).
Some primary measures are as follows:
- Restructuring of bank audits.
- Enhancing the role of legislative auditors in the banking sector.
Highlights: RBI Financial Stability Report
- In the initial period of the COVID-19 pandemic, government policies were aimed at maintaining normal functioning and at alleviating stress; the emphasis is now on fostering rehabilitation and sustaining the solvency of enterprises and households.
- Good news on vaccine production has underpinned concern about the outlook, even as the second wave of the virus, with more virulent strains, is overshadowed.
- The efficiency parameters of the banks have improved dramatically, with the assistance of regulatory exemptions extended in reaction to the COVID-19 pandemic.
Highlights: FSR Report
- The capital-to-risk weighted asset ratio (CRAR) of Scheduled Commercial Banks (SCBs) increased from 14.7% in March 2020 to 15.8% in September 2020, while the net non-performing asset ratio (GNPA) decreased from 8.4% to 7.5% and the provision coverage ratio (PCR) improved to 72.4% from 66.2% during this time.
- Macro stress analyses, including the first advance forecasts of net domestic product (GDP) for 2020-21 published on January 7, 2021, suggest that the GNPA ratio of all SCBs may rise from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 underneath the base case; the ration may grow to 14.8 per cent under an extreme stress situation. This illustrates the need for a prudent production of sufficient resources to survive a potential decline in the condition of properties.
Important Financial Stability Report Highlight for UPSC
- Network research showed that overall bilateral exposures between financial system organisations increased slightly during the quarter-end of September 2020. As the interbank market tends to shrink and banks are capitalising better, the contagion risk to the financial system has decreased in different scenarios relative to March 2020.
- Policy interventions by regulators and the government have maintained the smooth running of domestic markets and financial organisations; managing market uncertainty in the midst of increasing spillovers has become difficult, particularly where changes in some segments of capital markets are not in line with developments in the productive economy.
- Bank credit development remained stagnant, with a wide-ranging moderation across banking categories.
What is the Global Financial Stability Report?
The Global Financial Stability Study assesses the global financial environment and markets and discusses emerging market finance on an international scale. It reviews existing market dynamics, highlighting structural challenges that could give a rise to a challenge to financial stability and sustainable market reach for upcoming market lenders.
The study highlights the financial consequences of the global imbalances outlined by the IMF’s World Economic Outlook. It comprises, as special features, theoretical chapters or essays on fundamental or systemic problems related to international financial stability.
RBI Financial Stability Report
According to the Financial Stability Report (FSR) published by the Reserve Bank of India, the aggregate non-performing resources of banks will grow to 13.5 per cent by September 2021, from 7.5 per cent by September 2020. Unless the macroeconomic environment deteriorates in an extreme stress scenario, the GNPA ratio can rise to 14.8%, according to the study. “The stress tests indicate that the GNPA ratio of all listed commercial banks (SCBs) will increase from 7.5 per cent in September 2020 to 13.5 per cent in the base point by September 2021,” the FSR report added.
More on FSR Report
Among the banking sectors, the GNPA ratio of public sector banks (PSBs) could grow by 9.7% in September 2020 to 16.2% by September 2021, according to the baseline scenario. The net non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent over the same span of time. In the extreme stress scenario, the GNPA ratio of PSBs, PVBs and FBs may increase to 17.6 per cent, 8.8 per cent and 6.5 per cent, overall, by September 2021, according to the study.
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