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The Indian economy is confronting strong global headwinds, yet sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience, engendering financial system stability, the Reserve Bank of India (RBI) said in the Financial Stability Report.
“Buoyant demand for bank credit and early signs of a revival in investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks (SCBs),” it said.
The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven-year low of 5% and net non-performing assets (NNPA) have dropped to ten-year low of 1.3% in September according to the report.
“Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level capital-to-risk weighted assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9%, 14% and 13.1%, respectively,” the RBI said in the report.
“Stress tests for open-ended debt mutual funds showed no breach in limits pertaining to interest rate, credit and liquidity risks. Consolidated solvency ratio of both life and non-life insurance companies also remained above the prescribed minimum level,” it added.
As per the FSR, the global economy is facing formidable headwinds with recessionary risks looming large. The interplay of multiple shocks has resulted in tightened financial conditions and heightened volatility in financial markets.
In his foreword to the FSR, RBI Governor Shaktikanta Das said, “Amidst such global shocks and challenges, the Indian economy presents a picture of resilience.”
“Financial stability has been maintained. Domestic financial markets have remained stable and fully functional. The banking system is sound and well-capitalised. The non-banking financial sector has also withstood these challenges,” he said.
“Stress test results presented in this issue of the FSR indicate that banks would be able to withstand even severe stress conditions, should they materialise. Furthermore, in spite of formidable global headwinds, India’s external accounts remain well-cushioned and viable,” he added.
Going forward, core issues of management of climate change, dealing with unanticipated and fresh shocks, if any, further strengthening the buffers of India’s financial system, harnessing fintech innovations and deepening financial inclusion would continue to receive priority attention from regulators and policymakers, he added.
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