India’s financial system remains stable amid improving resilience of the banking sector, although emerging trends in the global economic environment as well as the geopolitical environment pose challenges, according to RBI’s 19th issue of the Financial Stability Report (FSR)
Global economic activity continues to face significant headwinds since the second half of 2018, culminating with a forecast of 3.3% lower global growth in 2019. Unfavorable geopolitical developments and trade tensions are gradually looming but as on expected on business and consumer confidence. Central banks in advanced economies (EAs) relaxed their monetary policy. While asset prices and global capital flows initially recovered in response, markets appear to be deeply conditioned by the implied ‘Fed put’ and any significant revaluation would require a reassessment of a range of market issues. emerging and developing economies (EMDE) with a risk of abrupt adjustments.
The national economy has recently experienced a bad patch, as private consumption, the main driver of GDP, has weakened. This, together with a new limited investment pipeline and a growing current account deficit, put pressure on the fiscal front. Stimulating demand for private investment remains a major challenge for the future, while being vigilant about the fallout from global financial markets.
Credit growth for programmed commercial banks (BSCs) accelerated, with public sector banks (BSPs) growing close to double digits. The capital adequacy of the SCBs improved after the recapitalization of the PSBs. With the bulk of inherited non-productive assets (NPA) already recognized in bank portfolios, the cycle of non-productive assets (NPA) appears to have reversed.
The provision coverage ratio (PCR) of all SCBs increased sharply to 60.6% in March 2019, compared to 52.4% in September 2018 and 48.3% in March 2018, strengthening the resilience of the banking sector. Macro stress tests for credit risk indicate that in the baseline scenario, the gross non-performing asset ratio (GNPA) of SCBs could drop from 9.3% in March 2019 to 9.0% in March 2020.
Recent developments in the non-bank financial corporations (NBFC) sector have brought the sector to greater market discipline, as top performing companies have continued to raise funds while those with ALM issues and / or quality assets were subject to higher borrowing costs.
In order to refine the supervisory mechanism of banks, the Reserve Bank has recently reviewed the structure of supervision in the context of the growing diversity, complexities and interdependence within the Indian financial sector. The revised prudential framework on stressed assets published by the Reserve Bank on June 7, 2019, while extending the old framework for the resolution of stressed assets, also constitutes an incentive for the early adoption of a resolution plan (PR) . To address the risk of counterparty concentration in the banking sector, the Reserve Bank introduced a revised framework for large exposures (LEF) as of April 1, 2019. To further improve the quality of information provided by rating agencies (ARC) and strengthen the rating framework, the Securities and Exchange Board of India (SEBI) introduced guidelines for enhanced disclosures by rating agencies.
In order to enable pension funds to improve their performance according to market conditions, the Pension Fund Development and Regulation Authority (PFRDA) has amended the investment guidelines. The Insolvency and Bankruptcy Board of India (IBBI) shows steady progress in resolving stressed assets.
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