RBI's Financial Stability Report

Context: Recently, Reserve bank of India (RBI) released ‘Financial Stability Report’.

About Financial Stability Report

• It is released in bi-annually.
• Report reflects the risks to financial stability and the resilience of the financial system.

Key highlights of report

• Report is published on three standards: baseline stress scenario, medium stress, severe stress scenario.
• Under the baseline scenario, the gross non-performing assets (NPAs) of banks may increase from 6.9% in September 2021 to 8.1% by September 2022 and under a severe stress scenario it could be 9.5%.
• For public sector banks, the gross NPA ratio may rise from 8.8% currently to 10.5% by September 2022, under the baseline scenario.
• For private banks, bad loans may rise from 4.6% to 5.2% over this period.

Global economic recovery has been losing momentum in the second half of 2021 due to

• Resurfacing Covid-19 infections and the new variant Omicron
• Supply disruptions and bottlenecks
• Elevated inflationary levels
• Shifts in monetary policy stances and actions across advanced economies and emerging market economies.
• Stressed on close monitoring of micro, small and medium enterprises (MSME).

For Scheduled commercial banks

• The capital to risk-weighted assets ratio (CRAR) rose to a new peak of 16.6%.
• CRAR is expressed as a percentage of a bank's risk-weighted credit exposures.
• Provisioning coverage ratio (PCR) stood at 68.1% in September 2021.
• PCR is the percentage of funds that a bank sets aside for losses due to bad debts.

Consumer credit risk

• RBI flagged a relatively high risk include consumer lending and microloans.
• In the case of consumer loans, bad loans have stabilised after rising in the immediate aftermath of the Covid crisis. However, delinquencies are still at elevated levels.
• Across individual consumer loan categories, education loans had the highest delinquency rate at 7.1%, while housing loans had the lowest rate at 1.9%.

Report on the entry of big tech in financial services

• Report highlights the three unique challenges of big techs company.
• They straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures.
• They have the potential to become dominant players in financial services.
• Big techs already have a huge customer base and can become dominant players, giving little room to smaller firms.

Non-performing Asset (NPA)

• It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• NPAs are recorded on a bank's balance sheet after a prolonged period of non-payment by the borrower.
• NPAs place financial burden on the lender; a significant number of NPAs over a period of time may indicate to regulators that the financial fitness of the bank is in jeopardy.

Classification of NPA

• NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.
• Substandard asset: an asset classified as an NPA for less than a period of 12 months.
• Doubtful asset: an asset that has been non-performing for more than a period of 12 months.
• Loss assets: loans with losses that need to be fully written off.
• Lenders have options to recover their losses, including taking possession of any collateral or selling off the loan at a significant discount to a collection agency.

Types of Nonperforming Assets (NPA)

• Overdraft and cash credit (OD/CC) accounts left out-of-order for more than 90 days.

Agricultural advances whose interest or principal installment payments remain overdue

• for two crop/harvest seasons for short duration crops.
• For one crop season for long duration crops.
• Expected payment on any other type of account is overdue for more than 90 days.

Measures to Curb NPAs in India

• Asset Quality Review in Banks.
• Creation of DRT or Debt Recovery Tribunals.
• Impetus to Asset Reconstruction Companies to proliferate.
• Introduced corporate debt restricting and the Insolvency and Bankruptcy Code.
• Mission Indradhanush to bring about reforms in the public sector banks.
• SAMADHAN scheme introduced fir asset management and debt change structure.