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Highlights of RBI Financial stability report

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RBI on 25th June 2015 released its 1tth bi-annual, Financial Stability Report.  It presents a picture of cautious optimism as it is concerned about the asset quality(bad loans) and points out that there are still a couple of quarters of pain ahead. The FSR report is published by a sub-committee headed by RBI governor, of Financial Stability and Development Council.

Highlights:

Good:

  • The combination of easing of global crisis, strong macroeconomic fundamentals of the domestic market in terms of growth, inflation, and current account and fiscal deficits, including increased FDIs in the past year, offers India a “reasonable degree of resilience” to fight uncertainties.

Bad:

  • Gross non-performing assets (NPAs) in the banking system have grown to 4.6% at the end of March this year from 4.5% in September 2014, while stressed advances including standard restructured loans have risen to 11.1% from 10.7%.
  • The rising NPA situation hasn’t bottomed out yet, and the FSR warns that asset quality deterioration is likely to continue for a few more quarters. State-run lenders are still trailing the private sector banks in asset quality, with stressed advances at 13.5% as against 4.6% for the private sector banks

Challenges:

  • Poor asset quality of banks and managing expectations are key challenges for regulators and the government.
  • Pressure on Capital adequacy of banks remains a concern.
  • Price pressures arising from possible sub-normal monsoon remains a significant risk to food and headline inflation
  • In the securities market, the FSR flagged concerns over the rapid rise in algorithm trading, saying this highlights the need for caution.
  • High leverage within the corporates is a concern area as his can hinder monetary policy transmission as corporates may not be able to benefit from falling interest rates due to high debt on their books.

What to do:

  • Focusing on governance and management processes, along with a re-orientation of business strategies will help improve the performance of state-run banks in the long-run
  • Actions taken by the government and RBI to reduce the stress by solving legacy issues and strengthening governance structures are important.
  • The report called for an immediate focus on agricultural insurance due to frequent natural calamities and its imapct mostly on small and marginal farmers.

It cited a need to strengthen the link between the derivatives market and the psysical market, mainly for agricultural commodities