Financial system stable despite slowdown:RBI report

News:The Reserve Bank of India has released its biannual Financial Stability Report,2019.

Facts:

About Financial Stability Report:

• The Financial Stability Report are bi-annual reports published by the Reserve Bank of India(RBI).
• The report is the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.
• It reviews the nature, magnitude and implications of risks that may have a bearing on the macroeconomic environment, financial institutions, markets and infrastructure.

Key takeaways from the report:

On India’s Economic Growth:

• The Reserve Bank has said that the country’s financial system remains stable despite slowing economic growth. 
• The aggregate demand has slowed down in the second half of the current financial year ending March 2020 adding to an already slowing economic growth.
• The Global factors such as a delay in Brexit deal, trade tensions, impending recession, oil-market disruptions and geopolitical risks has caused uncertainties leading to a significant deceleration in growth.
• The reviving of the twin engines of India’s economic growth namely private consumption and investment while being vigilant about developments in global financial markets remain a critical challenge for RBI.

On Banking Sector:

• The Banks capital adequacy ratio has improved significantly after the recapitalisation of public sector banks(PSBs) by the government. 
• Insolvency and Bankruptcy Code (IBC) has tackled the issue of bad loans which had slowed down the performance and growth of private, public-sector banks and even non-banks.
• RBI has also taken several policy measures to improve the condition of the financial system such as (a)introducing a liquidity management regime for NBFCs (b)improving the banks’ governance culture (c)resolution of stressed assets and (d)for the development of payment infrastructure.
• However,RBI expects the banks gross non-performing asset(GNPA) ratio to increase from 9.3% in September 2019 to 9.9% by September 2020.
• This is primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.
• Further,the frauds reported by the banks touched an all time high of around Rs 1.13 lakhs in the FY19.The frauds reported between 2001-18 accounted to 90% of the frauds registered in 2019 alone.

Additional information:

About Capital Adequacy Ratio(CAR):

• Capital Adequacy Ratio(CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. 
• It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
• The risk weighted assets take into account (a)credit risk (b)market risk and (c)operational risk while deciding Capital Adequacy Ratio(CAR).