{"id":198859,"date":"2022-08-05T18:07:42","date_gmt":"2022-08-05T12:37:42","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=198859"},"modified":"2022-08-05T18:07:42","modified_gmt":"2022-08-05T12:37:42","slug":"what-the-rbis-financial-stability-report-reveals-about-the-banking-sector","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/what-the-rbis-financial-stability-report-reveals-about-the-banking-sector\/","title":{"rendered":"What the RBI\u2019s Financial Stability Report reveals about the banking sector"},"content":{"rendered":"\n

Source<\/strong>: The post is based on the article \u201cWhat the RBI\u2019s Financial Stability Report reveals about the banking sector\u201d<\/strong> published in the Indian Express<\/strong> on 5th<\/sup> August 2022.<\/p>\n

Syllabus:<\/strong> GS 3 Issues and Challenges Pertaining to the growth and development of the Indian Economy; Investment<\/p>\n

Relevance<\/strong>: Bank reforms, regulatory reforms, Infrastructure Investment related reforms<\/p>\n

News: Recently, <\/strong>the RBI released its latest Financial Stability Report (FSR)<\/strong> which talks about the health of the Indian Banking System.<\/p>\n

What were the findings of the report?<\/strong><\/h5>\n

The RBI has stated that the banking system is healthy, considering the stress of the previous decade. The two key indicators clearly demonstrate the progress in the banking system:<\/p>\n

(1) The Bank\u2019s financial situation has been improved by successive waves of recapitalization<\/strong>. Therefore, banks have written off<\/strong> most of their bad loans. Therefore, they brought down their gross non-performing loans (NPAs)<\/strong> from 11% of total advances in 2017-18 to 5.9% in 2021-22.<\/p>\n

(2) Due to the above said financial turnaround, <\/strong>the banks have the space to resume their business of extending<\/strong> credit<\/strong>.<\/p>\n

Why the improvement in banks\u2019 financials is a glass half-full picture?<\/strong><\/h5>\n

(1) It is still unclear whether the banking system is healthy enough to finance the strong economic recovery<\/strong> or GDP growth.<\/strong> There are various factors behind it:<\/p>\n

(a) Over the last decade, banks have increasingly shifted away from providing credit to industry<\/strong> or financing investment<\/strong>. Now, banks are lending more to consumers<\/strong>. For example, the share of industry in total banking credit has declined from 43% in 2010 to 30% in 2020, and consumer loans have increased from 19% to 29%.<\/p>\n

(b) Most of the industry credit\/loan has been extended to the smaller firms or MSMEs<\/strong>. For example<\/strong>, due to the credit guarantee scheme<\/strong> in the wake of the pandemic, the loan growth for MSMEs has gone up from 3 percent in 2020 to 31 percent in 2022.<\/p>\n

(3) There has been little lending for private sector investment <\/strong>for infrastructure creation. Most of this went for public sector capital expenditure.<\/strong> Much of the lending to the private industry has been in the form of working capital loans, necessitated by the increase in commodity prices.<\/p>\n

Why is there so little lending for investment by large firms?<\/strong><\/h5>\n

There has been a situation of risk aversion on the part of firms and banks in terms of private sector investment:<\/p>\n

On the demand side<\/strong>, private sector investment has been sluggish for nearly a decade after the boom-and-bust of the mid-2000s<\/strong>. The firms have little reason to expand their production facilities.<\/p>\n

On the supply side<\/strong>, most of the bank loans given during the period 2004-09 for large infrastructure projects turned bad, leading to high levels of NPAs<\/strong>. Therefore, banks were unable to extend credit for a decade.<\/p>\n

Thus, even when their health improved, they remained wary of lending to large-scale industrial projects, preferring instead to shift to smaller-scale and less risky consumer lending.<\/p>\n

Why has the perception of risk aversion not changed even during the post-pandemic recovery?<\/strong><\/h5>\n

There is still no framework that will reduce the risk of private sector investment in infrastructure.<\/p>\n

The banks do not have a reassurance that in case the NPA problems do develop, the problem will be resolved expeditiously. The Insolvency and Bankruptcy Code has been plagued by delays and other problems.<\/p>\n

Now, there are other issues like heightened global macroeconomic uncertainty<\/strong>, growing geopolitical tensions,<\/strong> and uncertain recovery prospects of India\u2019s domestic economy.<\/p>\n

A healthy balance sheet of the banking sector is necessary, but not sufficient for economic growth.<\/p>\n

What should be done?<\/strong><\/p>\n

Both banks and firms have to be willing to take on the risk of investment in industry and infrastructure. \u00a0<\/strong><\/p>\n

Deep structural reforms<\/strong> should be introduced to the infrastructure framework, the resolution process, and management processes at the banks themselves.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on the article \u201cWhat the RBI\u2019s Financial Stability Report reveals about the banking sector\u201d published in the Indian Express on 5th August 2022. Syllabus: GS 3 Issues and Challenges Pertaining to the growth and development of the Indian Economy; Investment Relevance: Bank reforms, regulatory reforms, Infrastructure Investment related reforms News:… Continue reading What the RBI\u2019s Financial Stability Report reveals about the banking sector<\/span><\/a><\/p>\n","protected":false},"author":10343,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500],"class_list":["post-198859","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/198859","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10343"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=198859"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/198859\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=198859"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=198859"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=198859"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}