[Editorial Analysis] Signs of a turnaround: on RBI’s Financial Stability Report

Mains Paper 3: Economy

Prelims level: RBI

Mains level: RBI’s Financial Stability Report


• The Reserve Bank of India’s Financial Stability Report reveals the first half-yearly decline in the ratio of gross non-performing assets (GNPA) to advances since September 2015.

• The ratio across all scheduled commercial banks has eased to 10.8% as of end-September 2018, from 11.5% in March, with both public sector and private sector lenders posting drops in the key indicator of bad loans.

• A stress test for credit risk at banks that models varying levels of macroeconomic performance shows that for the baseline assumption, the GNPA ratio would narrow to 10.3% by March 2019.

• This prompted RBI Governor Shaktikanta Das to prognosticate that the sector “appears to be on course to recovery”.

The bad loan problem of PSBs

• Still, state-owned banks continue to have higher levels of bad loans than their private sector peers and are projected to show slower improvements over the second half of the fiscal.

• The GNPA ratio for public sector banks (PSBs) is posited to only inch lower to 14.6% by March, from 14.8% in September.

• The PSBs have a disproportionately higher share of bad loans from among large borrowers, who accounted for almost 55% of loans advanced by all banks as of September.

• The GNPA ratio for this category at PSBs was 21.6%, compared with just 7% at private banks.

• The RBI’s Prompt Corrective Action (PCA) framework, which attracted criticism including from a government appointee on the central bank’s board, has significantly helped lower contagion risk to the banking system.

• A contagion analysis that assumes there would be no sovereign guarantee provided for the 11 PSBs placed under the PCA curbs, in the event of a simultaneous failure, projects that solvency losses due to such failure have more than halved over the four quarters ended September: to ₹34,200 crore (3.1% of total Tier-1 capital) from ₹73,500 crore (6.8% of total Tier-1 capital).

Way forward

• Data on banking frauds are also a cause for concern.

• Close to 95% of the frauds reported in the six months ended September were credit-related, with PSBs again bearing the brunt of mala fide intent on the part of borrowers.

• The RBI’s report has justifiably spotlighted the urgent need to tighten the oversight framework for financial conglomerates in the wake of the IL&FS meltdown, which continues to ripple across the financial system, including at mutual funds and non-banking financial companies.

• The recent developments in NBFCs have underscored the need for greater prudence in risk-taking.

• Regulators and policymakers need to work together to insulate the economy from the risks of similar fiascos.


Prelims Questions:

Q.1) Which of the following are basic tenets of Planning in India?

1. Growth

2. Modernization

3. Self-reliance

4. Social justice

Choose the right option:

a) 1, 2 and 3

b) 1 and 3

c) 1, 3 and 4

d) All of the above

Correct Answer: D

Mains Questions:

Q.1) Critically evaluate the regulatory vigil should not ease after the half-yearly decline in banks’ gross NPA ratio.

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