On June 28, 2023, the Reserve Bank of India (RBI) released its half yearly publication(i.e) 27th Financial Stability Report (FSR), June 2023, which assesses risks to financial stability and the resilience of the Indian financial system. It reflects the collective evaluation of the Sub-Committee of the Financial Stability and Development Council (FSDC).
- As per it, Indian economy and the domestic financial system remain resilient despite global headwinds. This is due to the strong macroeconomic fundamentals.
- There is continuing growth momentum, moderating inflation, narrowing current account deficit, rising foreign exchange reserves, ongoing fiscal consolidation and a robust financial system are setting the economy on a path of sustained growth.
i.According to stress test results published in the FSR, under the baseline scenario, the aggregate Capital to Risk-Weighted Assets Ratio (CRAR) of 46 major banks is projected to slip from 17.0% (historical high) in March 2023 to 16.1% by March 2024.
- CRAR of these banks may go down to 14.7% in the medium stress scenario and to 13.3% under the severe stress scenario by March 2024, remaining above the minimum capital requirement, including the capital conservation buffer (CCB), of 11.5%.
Note: Stress tests assess the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment.
ii.The CRAR of Urban Co-Operative Banks (UCBs) rose to 16.5% in March 2023 while that of NBFCs stood at 27.5 per cent.
iii.The Common Equity Tier 1 (CET1) ratio of Scheduled Commercial Banks (SCBs) rose to 13.9% in March 2023.
iv.The Provisioning Coverage Ratio (PCR) rose to 74% amid strong growth in net interest income and significant reduction in provisions.
v.The profit after tax of SCBs registered a growth of 38.4% in 2022-23.
vi.None of the 46 SCBs would breach the minimum capital requirement of 9% in the next one year, even in a severely stressed situation, although 7 SCBs may fall short of the minimum capital inclusive of the CCB (Capital Conservation Buffer).
vii.Despite the recent step up in bank credit growth, India’s credit-to-GDP (Gross Domestic Product) gap remains negative since March 2013, reflecting low credit absorption in India relative to advanced and emerging market peers.
Banks’ bad loans at 10-year low
As per the report, the Bad loans in the banking sector have reached their lowest levels in a decade. SCBs’ Gross Non-Performing Assets (GNPA) ratio continued its downtrend and fell to a 10-year low of 3.9% in March 2023 and the net non-performing assets (NNPA) ratio declined to 1% of total loans, the lowest figure since June 2011.
- It indicates that banks have been actively setting aside provisions to cover bad loans
i.A further decline in bad loans is also expected by March 2024 under RBI’s baseline stress test scenario.
- GNPA ratio of all SCBs may improve to 3.6% by March 2024 under the baseline scenario from the March 2023 level of 3.9%.
- If, however, the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1% and 5.1%, respectively.
ii.The system-level GNPAs ratio and NNPAs ratio have sharply fallen from a high of 11.5% and 6.1% in March 2018, respectively.
Deposit claims worth Rs 751.8cr settled in FY23
As per the report, the Deposit Insurance and Credit Guarantee Corporation (DICGC) settled claims of Rs 751.8 crore during FY23.
- With the present deposit insurance limit of Rs 5 lakh, 98.1% of the deposit accounts (estimated three billion) and 46.3% of the assessable deposits (Rs 181.14 trillion) were insured.
- In absolute terms, the insured deposits amounted to Rs 83.89 trillion as of March 31, 2023.
i.The deposit insurance premium received by DICGC grew 9.7% (year-on-year/y-o-y) to Rs 21,381 crore during FY23. Of this, the share of the commercial banks was 94%.
ii.The Deposit Insurance Fund(DIF) with DICGC rose 15.5% y-o-y during FY23 to reach Rs 1.70 trillion on March 31, 2023.
iii.In FY22, DICGC had settled aggregate claims of Rs 8,516.6 crore under different channels. Of this, the largest, of Rs 3,791.6 crore, was to Unity Small Finance Bank (USFB) for paying the depositors of the erstwhile Punjab and Maharashtra Co-operative Bank.
States’ financial profile better in FY23; Debt stays High
The consolidated Gross Fiscal Deficit (GFD) of the states and Union Territories (UTs) declined from 4.1% of GDP in FY21 to 2.8% in FY22 and FY23. This shows a sharp improvement in the fiscal position of the states in FY23.
- This decline is driven by decline in revenue expenditure, and increase in the states’ tax revenue.
- For FY24, the states have budgeted a GFD-GDP ratio of 3.2%, which is significantly lower than the indicative target of 3.5% set by the Central government.
i.The Capital Expenditure (capex) of the states had reached 2.5% of GDP in FY22 and remained at the same level in FY23.
- It is budgeted to increase to 3.2% of GDP in FY24.
ii.Revenue expenditure declined from 14.2% of GDP in FY22 to 13.5% in FY23 (provisional). This has resulted in improvement in the quality of expenditure.
iii.The revenue expenditure to capital outlay (RECO) ratio for the states has improved from 7.1 during 2020-21 to the Budget estimate of 5.1 in 2023-24.
iv.State’s outstanding liabilities have moderated after reaching a 15-year high of 31 % of GDP at the end March 2021 to 27.9% of GDP by the end of March 2023.
- However, it is still higher than the 20% limit recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2018) and warrants further consolidation.
RBI floating rate bonds interest rate hiked to 8.05% from July 1, 2023
The RBI hiked the interest rate on its floating rate savings bonds, 2020 (Taxable)/FRSB 2020 (T) to 8.05% for period July 01, 2023 to December 31, 2023 and payable on January 01, 2024. The next interest rate review for RBI floating rate bonds is now due on January 1, 2024.
Features of RBI’s FRSB 2020 (T)
RBI launched the floating rate bonds in lieu of the earlier withdrawn 7.75% taxable bonds. Its key features are:
- Resident individuals and Hindu Undivided Families (HUFs) can invest in these bonds.
- The minimum investment starts at Rs 1,000 with no limit on the maximum amount.
- The bonds have a fixed tenure of seven year. Premature withdrawals are allowed for individual investors whose age is 60 years and above, subject to minimum lock-in period depending on the age of the bond holder.
- The interest amount is paid out half-yearly on January 1 and July 1 every year.
RBI injects Rs 75,000 crore into the banking system as liquidity tightens due to tax outflows
In June 2023, RBI conducted the Rs 75,000 crore 4-day variable rate repo(VRR) auction to address the expected stress on liquidity ahead of goods and service tax outflows. The RBI received bids worth Rs 75,695 crore but accepted only Rs 75,004 crore at a 6.51 percent cut-off rate.
- A repo auction is conducted by RBI to inject liquidity in the banking system, when it turns into deficit mode or is expected to tighten.
- Repo rate is the interest rate which the central bank, such as the Reserve Bank of India (RBI), lends money to commercial banks against government securities as collateral. It is a tool used by the central bank to manage liquidity in the economy.
- In a repo transaction, the banks sell government securities to the central bank with an agreement to repurchase them at a later date, usually the next day, at a slightly higher price, which includes the interest cost. The difference between the selling price and the repurchase price represents the interest cost or repo rate.
RBI upgrades info management system, launches next generation data warehouse CIMS
The RBI Governor Shaktikanta Das launched the Reserve Bank’s next generation data warehouse, viz., the Centralised Information Management System (CIMS) during the 17th Annual Statistics Day Conference on June 30, 2023.
- The conference was held as a part of the ‘National Statistics Day’ celebrations in the memory of Late Professor Prasanta Chandra Mahalanobis, who made invaluable contributions to the Indian statistical system and economic planning.
i.The system will first be used by commercial banks, followed by urban cooperative banks (UCBs) and Non-Banking Financial Companies (NBFCs).
ii.The CIMS will provide more data for public use and support online statistical analysis.
iii.It will also reduce regulatory compliance burden for regulated entities as reporting of data will become easier.
iv.The Reserve Bank established its first enterprise-wide data warehouse, the Central Database Management System (CDBMS) in 2002.