Financial Stability Report Highlights
The Reserve Bank of India's (RBI) Financial Stability Report (FSR) addresses potential challenges and forecasts related to the banking sector and economic growth.
Banking Sector Challenges
- Projected increase in bad loans and potential decline in capital buffers under stress scenarios.
- Concerns over microfinance and consumer credit stress.
- Sharp rise in write-offs among private sector banks could mask asset quality deterioration.
- Small finance banks face higher retail lending impairments, with a GNPA ratio of 2.7%.
- 50% of credit card and personal loan borrowers have other existing loans.
- Unhedged external commercial borrowings (ECBs) remain high at $65.49 billion (34.4% of total ECBs).
- Foreign currency borrowing by NBFCs poses currency risks if unhedged.
Economic Growth Projections
- Economy expected to grow by 6.6% in FY25.
- Growth aided by rural consumption, government investments, and strong service exports.
- Mutual funds have indicated their ability to withstand redemption pressures
Risk Factors
- Irrational market exuberance could be fueled by monetary easing and accommodative conditions.
- Cyberattack risks highlighted due to reliance on AI tools like ChatGPT.
- Potential risks from softened industrial activities, global spillovers, and protective trade policies.
Stress Test Scenarios
- Bad loan ratio could rise to 3% by March 2026, from 2.6% in September 2024.
- Capital adequacy ratio may decline to 16.5% in March 2026 under baseline, and further in high-risk scenarios.
- Key financial ratios for banks, insurance, and finance companies are expected to stay above regulatory requirements until 2026.
The report underscores the need for close monitoring of financial vulnerabilities and stresses the importance of maintaining economic resilience in the face of potential shocks.
