RBI’s Financial Stability Report: A Simple Guide for Everyone

Highlights from RBI’s Financial Stability Report - June 2023

The Reserve Bank of India (RBI) is the central bank of our country. It is responsible for keeping our money safe and stable. It also regulates the banks and other financial institutions that we use for saving, borrowing, and investing.

Every six months, the RBI publishes a report called the Financial Stability Report (FSR). This report tells us how healthy and strong our financial system is. It also warns us about any risks or challenges that may affect our economy and our well-being.

The latest FSR was released on June 28, 2023. It has some good news and some bad news for us. Let’s look at some of the highlights from the report.

Good News: Banks are more profitable and resilient

One of the main findings of the FSR is that our banks are doing well. They have improved their profitability, capital, and asset quality in the last year.

• Profitability: This means how much money banks earn from their business. The FSR says that banks’ return on assets (ROA) and return on equity (ROE) have increased in March 2023 compared to March 2022. ROA measures how much profit a bank makes for every rupee of its assets. ROE measures how much profit a bank makes for every rupee of its shareholders’ money. Higher ROA and ROE mean that banks are using their resources more efficiently and effectively.
• Capital: This means how much money banks have to support their business and absorb losses. The FSR says that banks’ capital-to-risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) ratio have risen to historical highs of 17.1 percent and 13.9 percent, respectively, in March 2023. CRAR measures how much capital a bank has as a percentage of its risky assets, such as loans. CET1 measures how much core capital a bank has as a percentage of its risky assets. Core capital includes common shares and retained earnings. Higher CRAR and CET1 mean that banks have more cushion to deal with unexpected shocks or losses.
• Asset Quality: This means how good or bad the loans given by banks are. The FSR says that banks’ gross non-performing assets (GNPA) ratio and net non-performing assets (NNPA) ratio have fallen to a 10-year low of 3.9 percent and 1.0 percent, respectively, in March 2023. GNPA measures how much of the total loans given by banks are not repaid or are likely to be not repaid by the borrowers. NNPA measures how much of the net loans given by banks are not repaid or are likely to be not repaid by the borrowers. Net loans are total loans minus provisions made by banks for bad loans. Lower GNPA and NNPA mean that banks have fewer bad loans and more recoveries.

The FSR also says that banks can withstand severe stress scenarios and still comply with the minimum capital requirements. This means that even if something very bad happens, such as a big economic slowdown or a pandemic, our banks will not collapse or fail.

Bad News: Risks and challenges remain

While the FSR praises our banks for their performance, it also warns us about some risks and challenges that may affect our financial stability in the future.

• Credit Growth: This means how fast or slow the loans given by banks are growing. The FSR says that credit growth has picked up in 2023, reaching 15.4 percent on June 2, 2023. This is higher than the deposit growth, which stood at 11.8 percent on the same date. Deposit growth means how fast or slow the money deposited by people in banks is growing. Higher credit growth than deposit growth means that banks are lending more money than they are getting from people. This may create a gap between the demand and supply of money in the economy. This may also make it harder for banks to manage their liquidity or cash flow.
• Sectoral Risks: This means how risky or safe different sectors of the economy are for lending by banks. The FSR says that some sectors, such as agriculture, industry, services, and retail, have shown improvement in their asset quality in March 2023 compared to March 2022. However, some sectors, such as infrastructure, power, telecom, and real estate, still have high levels of stress and bad loans. These sectors may pose a threat to the financial stability of our banks if they do not improve their performance or repay their debts.
• Cyber Risks: This means how vulnerable or secure our digital systems are from cyber attacks or frauds. The FSR says that cyber incidents have increased in frequency and severity in recent times. These incidents can affect the confidentiality, integrity, and availability of our data, systems, and services. They can also cause financial losses, reputational damage, and operational disruptions. The FSR urges banks and other financial institutions to strengthen their cyber resilience and security measures to protect themselves and their customers from cyber threats.

Conclusion

The FSR is an important document that tells us how our financial system is doing. It also helps us to be aware of the opportunities and challenges that we face in our economy. We should read and understand the FSR to make informed decisions about our money and our future.

If you want to read the full FSR, you can find it on the RBI website here.

FSR, Highlights, Challenges, FSDC, Risks, Resilience, Banks, Economy