Financial Stability Report by RBI

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Context: On December 27, 2019, RBI released the Financial Stability Report. The report is biennial and reflects the collective assessment of the Sub-committee of the Financial Stability and Development Council.

Prelims: Current events of national and international importance.
Mains: GS III-

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.

About the Financial Stability Report:

  • The Reserve Bank of India today released the 20th issue of the Financial Stability Report (FSR). 
  • The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability, as also the resilience of the financial system.
  • The Report also discusses issues relating to the development and regulation of the financial sector.

About FSDC:

  • The Financial Stability and Development Council (FSDC) was constituted in December 2010. The FSDC was set up to strengthen and institutionalise the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.
  • An apex-level FSDC is not a statutory body.


  • The Council is chaired by the Union Finance Minister and its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority.
  • It also includes the chairman of the Insolvency and Bankruptcy Board (IBBI).

What does it do?

  • The Council deals, inter-alia, with issues relating to financial stability, financial sector development, inter–regulatory coordination, financial literacy, financial inclusion and macro-prudential supervision of the economy including the functioning of large financial conglomerates.
  • No funds are separately allocated to the Council for undertaking its activities.


Key Points About the state of the financial sector:

Provision Coverage Ratio :

Provisioning Coverage Ratio (PCR) refers to the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans.

It is the ratio that gives an indication of the provisions made against bad loans. When the PCR is higher, the unexposed part of bad loans is lower. Therefore, higher PCR is good for an economy.

  • The Provision Coverage Ratio of banks increased to 61.5% in September 2019 from 60.5% in March 2019.
  • The report also stated that capital to risk-weighted assets ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019. The credit losses have jumped by 7.33% as compared to June 2019.

Credit Growth:

Bank credit is the total amount of funds a person or business can borrow from a bank.

  • Scheduled Commercial Banks’ (SCBs) credit growth remained subdued at 8.7% year-on-year (y-o-y) in September 2019, down from 13.2% in March 2019.
  • Private Sector Banks (PSBs) registered double-digit credit growth of 16.5% in September 2019.

Gross Non-Performing Asset (GNPA) Ratio:

  • Non-Performing Assets (NPA) refer to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest.
  • In most cases, debt is classified as non-performing, when the loan payments have not been made for a minimum period of 90 days.
  • Gross non-performing assets are the sum of all the loans that have been defaulted by the individuals who have acquired loans from the financial institution.
  • Net non-performing assets are the amount that is realized after the provision amount has been deducted from the gross non-performing assets.
  • Expected Increase in Gross Non-Performing Asset (GNPA) Ratio.
  • SCB’s Gross Non-Performing Asset (GNPA) ratio of banks may increase to 9.9% by September 2020 from 9.3% in September 2019.
  • Public Sector Banks’ (PSB) GNPA ratios may increase to 13.2% by September 2020 from 12.7% in September 2019.
  • For private banks, the ratio may climb to 4.2% from 3.9%, under the stress scenario.
  • Foreign banks’ (FB) GNPA ratio may increase to 3.1% from 2.9% in September 2019.
  • Due to changes in the macroeconomic scenario, the marginal increase in slippages and the denominator effect of declining credit growth.
  • The state-run banks’ GNPA ratios may increase to 13.2% by September 2020 from 12.7% in September 2019.
  • The recapitalisation of state-run banks by the government, banks’ capital to risk-weighted assets ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019.
  • The asset quality of agriculture and services sectors, as measured by their GNPA ratios, deteriorated to 10.1% in September 2019 from about 8% in March 2019.
  • The banks’ net non-performing assets (NNPA) ratio declined in September 2019 to 3.7%.

Slippages: Fresh accretion of NPAs during the year or falling below the current position of standard assets of the bank is a slippage.

Denominator effect: The denominator effect is a way of describing the impact the crisis had on portfolios, especially those of large institutions such as endowments. 


Capital to Risk-weighted Assets Ratio (CRAR):

  • CRAR is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. It is also known as the Capital Adequacy Ratio (CAR).
  • CAR = (Tier 1 Capital + Tier 2 Capital)/Risk weighted Assets
  • Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and audited revenue reserves. Tier-1 capital is the capital that is permanently and easily available to cushion losses suffered by a bank without it being required to stop operating.
  • Tier-2 capital comprises unaudited retained earnings, unaudited reserves, and general loss reserves. This capital absorbs losses in the event of a company winding up or liquidating
  • All banks’ Capital to Risk-weighted Assets Ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019, following the recapitalisation of PSBs by the government.


  • The frauds reported by the banks touched an all-time high of around Rs 1.13 lakhs in FY19.
  • The number of cases that accounted for the fraud was 4,412.
  • The frauds reported between 2001-18 accounted for 90% of the frauds registered in 2019 alone

Foreign portfolio investors (FPIs):

  • According to data from the National Securities Depository Ltd. (NSDL), the year 2019 saw foreign portfolio investors (FPIs) investing heavily in Indian equities with total inflows breaching the ₹1 lakh-crore mark only for the fourth time ever and the first since 2013.
  • The year also saw the benchmark indices breaching record levels on various occasions with the 30-share Sensex touching a high of 41,810 on December 20. FPIs are often considered to be the prime drivers of any bull run in the Indian stock markets.

Challenges to kick start growth in the economy:

  • Corporate governance is a concern across India Inc.
  • The twin engines of consumption and investment remain the key challenge even while remaining vigilant about spillovers from global financial markets. 

Concern in economy:

  • Major risk groups include “global risks, risk perceptions on macroeconomic conditions, financial market risks and institutional positions”.
  • The perception of risks on various fronts like domestic growth, fiscal, corporate sector and banks’ asset quality increased between April and October 2019.

Way Forward:

  • The global economy confronted a number of uncertainties – a delay in the Brexit deal, trade tensions, oil-market disruptions and geopolitical risks – leading to significant deceleration in growth.
  • As regards the domestic economy, aggregate demand slackened in the second quarter of 2019-20 further extending the growth deceleration.
  • Reviving the twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge going forward.


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