Financial Stability Report

The Reserve Bank of India (RBI) has released the 22nd issue of the Financial Stability Report (FSR) 2021. Global Financial Stability Report has been published by the International Monetary Fund (IMF).

Key Highlights

• The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8 per cent in September 2020 from 14.7 per cent in March 2020.
• The gross non-performing asset (GNPA) ratio of SCBs declined to 7.5 per cent from 8.4 per cent.
• The provision coverage ratio (PCR) of SCBs improved to 72.4 per cent from 66.2 per cent.
• The Macro stress tests incorporating the first advance estimates of gross domestic product (GDP) for 2020-21 indicate that the GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021.
• It highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration.
• The network analysis reveals that total bilateral exposures among entities in the financial system increased marginally during the quarter ended in September 2020.
• The gross non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6% and 2.5% to 7.9% and 5.4%, respectively.

Recommendation of RBI to deal existing stock of Bad Loans

Recapitalising weak public sector banks

• The banks may not be in a position to raise money on their own, unlike the bigger ones (SBI, PNB, BoB etc.) and may require handholding from the government.

RBI as banking judge of the Banking System

• The interventions from judiciary and government on stressed asset resolution have done much damage to the banking sector in the past.
• The RBI is given a free hand to do its job and regulator is the best judge of what is good for the banking system.

Idea of Bad Bank

• The Bad Bank refers to a separate entity where all the bad assets of the banking industry can be bundled into.
• A bad bank can be a reality only if the government takes the lead and provides the initial capital.

About capital to risk-weighted assets ratio (CRAR)

• It is also known as Capital Adequacy Ratio, which the ratio of a bank’s capital to its risk.
• The banking regulator tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
• The higher the CRAR of a bank, the better capitalised it is.
• The capital to risk-weighted assets ratio is calculated by adding a bank’s tier 1 capital and tier 2 capitals and dividing the total by its total risk-weighted assets.