Risks according to the 29th RBI Financial Stability Report

Source: The post risks according to the 29th RBI Financial Stability Report has been created, based on the article “Improving financial stability: Some areas of concern remain” published in “Business standard” on 2nd July 2024

UPSC Syllabus Topic: GS Paper3- Economy

Context: The latest 29th RBI Financial Stability Report shows that India’s financial system is strong and stable. Non-performing assets are low, but risks like shadow banking and climate change need monitoring. The report highlights global monetary trends, lower demand, and the impact of climate risks on the economy.

What does the RBI’s Financial Stability Report reveal about India’s financial system?

1. The RBI’s Financial Stability Report highlights a strong and stable financial system in India.
2. A key indicator, the gross ratio of non-performing assets, is at a multi-year low of 2.8%, suggesting improved bank health.
3. The report anticipates a continued decrease in non-performing assets, underscoring a positive outlook for the banking sector.

What are the potential risks according to RBI‘s financial stability report?

1.Shadow Banking Sector: The Financial Stability Report highlights the potential risks from non-banking financial companies (NBFCs). Despite stricter regulations post the IL&FS collapse, the heavy borrowing by NBFCs from banks poses a systemic risk.

2.Maturity Transformation: The activities of NBFCs involve maturity transformation, where they fund long-term loans with short-term borrowings. This can lead to instability if there are sudden shifts in market conditions.

3.Climate and Cyber Risks: Both climate change and cyber threats are identified as significant macro-financial risks in the report. The increasing incidence and potential impact of climate-related events and cyber-attacks require urgent attention and preparation from financial regulators and institutions.

4.Consumer Demand and Economic Growth: Lower consumption and demand are also noted as increasing risks, impacting overall economic growth and potentially leading to broader financial instability. Concerns about stagnant wages and employment contribute to these risks.

Question for practice:

Discuss the various risks to India’s financial stability as highlighted in the 29th RBI Financial Stability Report.