Financial Stability Report (FSR)

 

Latest Context:

Recently, the Reserve Bank of India (RBI) released the Financial Stability Report (FSR).

Key Highlights of the Report are:

• The report stated that Indian banking system is well capitalised and capable of absorbing shocks over a one-year period even in the absence of any further capital infusion.
• The Gross Non-Performing Assets (GNPA) ratio of Scheduled Commercial Banks (SCBs) fell to a 10-year low of 3.9% in March 2023.
• Net Non-Performing Assets (NNPA) ratio fell to 1.0%.
• Gross NPA refers to the total value of non-performing assets in a bank's loan portfolio. Net NPA is a more refined measure of the quality of a bank's loan portfolio. It represents the portion of gross NPAs that have not been provisioned for. Provisioning refers to the allocation of funds by a bank to cover potential losses due to bad loans. Net NPAs deduct the provisions made for bad loans from the gross NPA amount.
• Capital to Risk-Weighted Assets Ratio (CRAR) of SCBs rose to record high of 17.1% in March 2023.
• In the report, the RBI talks about creating a framework for global regulation, including possibility of prohibition of unbacked crypto assets, stablecoins etc. Basically, the Stablecoins are cryptocurrencies whose value is attached to that of another currency or commodity, or financial instrument.
• The report claimed that Insolvency and Bankruptcy Code (IBC) has rescued almost 72% of the distressed assets since, it came into force in 2016.
• The average time for completing corporate insolvency resolution process that yielded resolution plans was 512 days (330 days provided in IBC).

About the Financial Stability Report (FSR)

• It’s a bi-annual report released by the Reserve Bank of India (RBI).
• It provides an assessment of the overall stability and resilience of the Indian financial system.
• The report analyzes various risks and vulnerabilities faced by the financial system and offers insights into the RBI's perspective on these issues.
• The FSR aims to enhance market participants' understanding of the key risks and challenges in the financial system and promote a more informed decision-making process.
• It covers a wide range of topics including macro-economic developments, global financial market conditions, domestic and international regulatory developments, and stress tests conducted on banks and other financial institutions.
• The report examines both domestic and global factors that could impact the stability of the Indian financial system.
• The FSR also evaluates the resilience of banks and non-banking financial institutions, highlighting any areas of concern and suggesting measures to address them.

Some key points about Non-Performing Assets (NPAs) are:

• Definition: Non-Performing Assets (NPAs), also known as ‘bad loans’ are the loans or advances provided by banks and financial institutions that have stopped generating income for the lender. NPAs arise when borrowers fail to repay their loan obligations, typically by defaulting on their scheduled interest or principal payments.

• Classification of NPAs: In India, NPAs are classified based on the number of days a loan remains overdue. The Reserve Bank of India (RBI) has set specific guidelines for the classification of NPAs. Loans that have remained overdue for 90 days or more are categorized as NPAs.

• Impact on Banks: NPAs pose significant challenges to the banking sector and the overall financial system. When borrowers default on their loan repayments, it affects the profitability and financial health of banks. It reduces their ability to lend.

• Asset Quality Review (AQR): In recent years, the RBI has undertaken Asset Quality Reviews to assess the true extent of NPAs in the banking system. These reviews involved a comprehensive examination of banks loan books to identify hidden or underreported NPAs. The AQR exercise aimed to improve transparency and ensure that banks recognize and provide for NPAs appropriately.

• Provisioning and Recovery: Banks are required to set aside a certain amount of funds as provisions to cover potential losses arising from NPAs. These provisions act as a buffer against the impact of bad loans on a bank's financials. Banks also employ various methods to recover NPAs, such as restructuring the loan, selling the distressed assets, or initiating legal actions to seize collateral.

• Insolvency and Bankruptcy Code (IBC): The introduction of the Insolvency and Bankruptcy Code in India has provided a legal framework for resolving NPAs in a time-bound manner. It allows creditors to initiate insolvency proceedings against defaulting borrowers and facilitates the recovery or resolution of stressed assets.

 

 

Must Check: IAS Coaching Centre In Delhi