Editorial Team

“While the financial system is better placed with capital and liquidity, risks are also heightened, both in quantum (burgeoning NPAs) as well as in nature (new kinds of risk including cyber risk). These necessitate proactive risk management strategies from financial institutions as well as the government” Jaya Vaidhyanathan, CEO, BCT Digital said. She was commenting on the Financial Stability Report (FSR) released recently by the Reserve Bank of India.

According to Ms. Vaidhyanathan, the FSR had some important takeaways.

The positive ones were:

  • Financial institutions were better placed than before, with good capital and liquidity levels during the second wave of the pandemic
  • As per FSR projections, Gross Non-Performing Assets (GNPA) of scheduled commercial banks seemed to be much better than those estimated in the previous FSR (January 21), which had projected alarming numbers of 13.5% (base scenario) and 14.8% (extreme scenario) by September 21
  • Banks were expected to remain well capitalised and were able to sustain a severe stress scenario

The FSR, however, also pointed at some negatives, Ms. Vaidhyanathan pointed out. These were:

  • Government finances were stretched, with income shortfall due to lockdown induced economic inactivity and increased expenditure on health and welfare
  • RBIs stress tests forecast Gross Non-Performing Asset (GNPA) levels of scheduled commercial banks were likely to rise substantially from 7.5% in March 21 to 9.8% (base scenario)/11.2% (extreme scenario) by March22
  • Credit growth continued to remain muted while deposit growth continued on account of precautionary savings
  • Rising incidence of data breaches and cyber-attacks was an additional cause for concern with remote working and increased digital transactions

Referring to some worrisome observations in the FSR, Ms. Vaidhyanathan recounted MSME and retail loan portfolios showing signs of stress, which could manifest in the form of NPAs in the coming quarters, upon withdrawal of relief measures like the moratorium and (ECGLS) and inflation being a key concern, with prices of commodities including oil shooting up, which could lead to hardship to the public, trading losses for banks and business failures. She stated that as pointed out in the FSR, even under stress, the scheduled commercial banks had sufficient capital, both at the individual and the aggregate levels. It was due to monetary, regulatory and fiscal policy measures that financial institutions did not face solvency risks and markets remained stable. However, given that the risks were heightened, both in quantum (burgeoning NPAs) as well as in nature (new kinds of risk including cyber risk), financial institutions as well as the government need to proactively manage risks, Ms. Vaidhyanathan exhorted.

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