Financial system: financial system capable of absorbing macroeconomic shocks with a strong capital buffer

India’s banking system and non-banking financial firms are in fine shape as they are likely to meet capital standards even in the worst case of crisis after bringing bad debts to their lowest level in six years, said the Reserve Bank of India in its Financial Stability Report.

Macroeconomic stress tests reveal that all banks are able to absorb macroeconomic shocks without further injection of capital by stakeholders and would be able to meet minimum capital adequacy standards even in a severe stress scenario , although some segments as well as non-bank financial companies may be vulnerable to liquidity disruptions.

“With adequate capital buffers and improving asset quality levels, India’s banking system is well positioned to support economic growth, with bank lending growing in double digits after a long hiatus,” the Indian banking system said. regulator, adding that NBFCs also remain well capitalized. .

India’s economy and domestic financial system remain strong and resilient in a hostile international environment, supported by strong domestic macroeconomic fundamentals, RBI said. Financial markets, however, are experiencing heightened volatility due to the global fallout.

“Preserving macroeconomic and financial stability on an enduring basis is key to reviving India’s appointment with its long-term growth prospects and development aspirations, including its emerging role in the global economy,” said RBI.

Banks’ asset quality improved steadily throughout the year, with the gross non-performing asset ratio (GNPA) falling to a six-year low of 5.9% in March 2022, from 7.4% one year ago. The sector net NPA ratio decreased by 70 basis points in 2021-22 to stand at 1.7% at the end of the year. The collective provisioning coverage ratio improved to 70.9% in March 2022 from 67.6% a year ago.

Their gross NPA ratio could improve to 5.3% by March 2023, thanks to higher expected bank credit growth. However, if the situation faces a medium or severe stress scenario, the ratio can 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 affect the stability of the banking sector, showed an improvement in soundness, efficiency and dimensions market risk in the second half of FY22. Asset quality and profitability indicators remained broadly unchanged in 2021-22

The universe of smaller financial banks, which represent 1% of total banking sector assets, saw total deposits and credit grow by 32.7% and 23.1% respectively in FY22. The total credit extended by NBFC stood at Rs 28.5 lakh crore as of March 2022.

Under the high-risk shock, the NBFC sector’s capital adequacy ratio could fall by 82 basis points to 23.51%, with the possibility that 15 NBFCs seeking to obtain a CRAR fall below minimum regulatory requirements.

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Don F. Davis