Bharat SainiLast Updated on February 27, 2017 by Bharat Saini
Financial Stability Report (FSR) released by Reserve Bank of India (RBI) on December 29, 2016 gives an assessment of risks to financial stability as also the resilience of the financial system and confirms that overall; India’s financial system remains stable although banks continue to face significant levels of stress. FSR highlights that with reduced policy uncertainty, along with tax and legislative reforms will help in realising the benefits from the strong macroeconomic fundamentals. It reflects optimism that the measures such as transition to the nationwide Goods and Services Tax (GST) and Demonetisation could potentially transform the domestic economy, despite some inconvenience to public and the short-term adverse impact on growth. FSR asserts that overall risks to the corporate sector have moderated in 2016-17, notwithstanding reports of lower turnover.
In the external sector, the narrowing of the current account deficit partly reflects the external spillovers in the form of sluggish trade growth. It is concerned about decline in the flow of remittances and opines that capital flow, more than trade, is likely to influence the exchange rate.
Commenting on the soundness and resilience of the Financial Institutions, FSR states that the risks to the banking sector remained elevated due to continuous deterioration in asset quality and increased non-performing assets, low profitability and liquidity. The business growth of Scheduled Commercial Banks remained subdued and their profit after tax contracted on y-o-y basis in the first half of 2016-17. Public Sector Banks continued to record the lowest capital to risk-weighted assets ratio (CRAR) with negative returns on their assets.
As regards Financial Sector Regulation, FSR confirms that with the implementation of global regulatory reforms most of the major international banks have become more resilient in terms of capital and liquidity. Globally, some risks inherent in banks may be getting transferred to other segments of the financial markets due to increased regulatory scrutiny and increased capital requirements for banks.
While regulatory measures on partial credit enhancement will support the corporate bond market in India, the guidelines on market mechanism and large exposures will help in reducing banks’ exposures to large corporate sector.
The macro prudential and other regulatory measures are expected to enhance transparency in the functioning of financial markets and empower customers with wider product-choices and more effective mechanism for grievance redressal.
The Securities and Exchange Board of India has taken several measures that include tightening of insider trading norms and enhancing transparency in the policies and procedures adopted by Credit Rating Agencies.
The guidelines issued by Insurance Regulatory and Development Authority of India seek to address operational aspects such as monitoring the foreign direct investment in insurance sector, approval of share transfer, and ceiling of holdings on various classes of investors, among others.
The National Pension System continued to gain traction in terms of the number of subscribers as well as assets under management. Introduction of two new life cycle funds and creation of a separate asset class for alternate investment are expected to provide better options to investors in pension schemes.
The degree of interconnectedness in the banking system measured by the connectivity ratio showed a declining trend. SCBs were the dominant players accounting for nearly 59 per cent of the total bilateral exposures followed by NBFCs. On a net basis, asset management companies managing mutual funds (AMC-MFs) followed by the insurance companies were the biggest fund providers in the system while NBFCs followed by SCBs were the biggest receivers of funds.
The FSR brought out on behalf of the Sub-Committee of the Financial Stability and Development Council is as such sobering.
