Financial system: Financial system capable of absorbing macro shocks with strong capital buffer

The Indian banking system and the non-banking finance companies are in fine fettle as they are likely to meet the capital norms even in the most severe stress case after bringing down bad loans to a six-year low, the Reserve Bank of India said in its Financial Stability Report.

Macro stress tests reveal that all banks are capable of absorbing macroeconomic shocks without further capital infusion by stakeholders and would be able to comply with minimum capital adequacy norms even in a severe stress scenario, although some segments as well as non-banking financial companies may be vulnerable to liquidity disruptions.

“On the back of adequate capital buffers and improving asset quality levels, the Indian banking system is well positioned to support economic growth, with bank credit growing in double digits after a long hiatus,” the regulator said, adding that NBFCs too remain well capitalised.

Banks can Absorb Macro Shocks without Further Capital Infusion

The Indian economy and the domestic financial system remain strong and resilient in a hostile international environment, supported by robust domestic macroeconomic fundamentals, RBI said. Financial markets, however, are witnessing heightened volatility because of global spillovers.

“Preserving macroeconomic and financial stability on a durable basis holds the key to reviving India’s tryst with its longer term growth prospects and developmental aspirations, including its emerging role in the global economy,” RBI said.

Asset quality of banks improved steadily through the year, with gross non-performing assets (GNPA) ratio declining to a six-year low of 5.9% in March 2022 from 7.4% a year back. The sectoral net NPA ratio fell by 70 bps during 2021-22 to 1.7% at the year-end. The collective provisioning coverage ratio improved to 70.9% in March 2022 from 67.6% a year ago.

Their gross NPA ratio may improve to 5.3% by March 2023 driven by higher expected bank credit growth. However, if the situation faces a medium or severe stress scenario, the ratio may rise to 6.2% and 8.3% respectively.

The banking stability indicator, which presents an overall assessment of changes in underlying conditions and risk factors that have a bearing on the stability of the banking sector, showed improvement in soundness, efficiency and market risk dimensions in the second half of FY22. Asset quality and profitability indicators remained broadly unchanged during 2021-22

The universe of small finance banks, which form 1% of total assets of the banking sector, saw aggregate deposits and credit rising by 32.7% and 23.1% respectively in FY22. Aggregate credit extended by NBFCs stood at Rs 28.5 lakh crore in March 2022.

Under the high-risk shock, the capital adequacy ratio of the NBFC sector may fall by 82 bps to 23.51% with possibility of 15 NBFCs seeking CRAR falling below the minimum regulatory requirements.

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