02/01/2020 - Indian Economy

KEY POINTS

·        The latest FSR does indicate that the financial system has sort of stabilised, given the myriad challenges faced in the last couple of years.

·        The good part of the story is that the NPA levels have stabilised at 9.3% It indicates that on an incremental basis NPA accretion is moderate, and the overall NPA ratio indicates that the AQR issue is tackled almost completely.

·        The fact that the CRAR (capital to risk weighted assets ratio) has improved to 15.1% is reflective of a great deal of resilience built in the system, with substantial support coming from the government in the form of recapitalisation of PSBs.

·        An interesting outcome of the stable picture presented is the capital adequacy ratio of 15%. While it was necessary for banks to be well-capitalised to fund future growth, the CRAR is a delicately balanced concept.

·        The focus must be on expanding credit in a judicious manner, or else it will not be an efficient use of capital. Quite clearly, banks must use their capital in lending, or else the purpose of dis-intermediation would be dented.

·        The other area of concern has been the non-banking financial companies (NBFCs), and here RBI is more cautious.

·        The fact that funding to these institutions has been a challenge from markets as well as banks is well known. The asset-liability mismatch that engendered the crisis is being addressed gradually by NBFCs, which will help in stabilising the system.

·        Interestingly, it shows that PSBs have lowered their exposures to this sector, while that of private banks and housing finance companies (HFCs) have increased.

·        NBFCs, cooperative banks have to pay more attention to risk to strengthen their balance sheets and make them more resilient to shocks. 

Please review. Thank you.

Please review.