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[op-ed snap] Signs of a turnaround: on RBI’s Financial Stability Report


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: RBI financial stability report, Prompt corrective action.

Mains level: NPA problem and solution


  1. According to the recently released Financial Stability report, The fog of bad loans shrouding the banking sector appears to be lifting after a long period of sustained stress.

Signs of turnaround

  1. The Reserve Bank of India’s Financial Stability Report reveals the first half-yearly decline in the ratio of gross non-performing assets (GNPA) to advances since September 2015.
  2. The ratio across all scheduled commercial banks has eased to 10.8% as of end-September 2018, from 11.5% in March, with both public sector and private sector lenders posting drops in the key indicator of bad loans.
  3. A stress test for credit risk at banks that models varying levels of macro-economic performance shows that for the baseline assumption, the GNPA ratio would narrow to 10.3% by March 2019.
  4. According to the FSR, among the broad sectors, the asset quality of industry sector improved in September 2018 as compared to March 2018 whereas that of agriculture and retail sectors deteriorated


PSB still have higher level of bad loans

  1. State-owned banks continue to have higher levels of bad loans than their private sector peers and are projected to show slower improvements over the second half of the fiscal.
  2. The GNPA ratio for public sector banks (PSBs) is posited to only inch lower to 14.6% by March, from 14.8% in September.
  3. One reason is that PSBs have a disproportionately higher share of bad loans from among large borrowers, who accounted for almost 55% of loans advanced by all banks as of September. The GNPA ratio for this category at PSBs was 21.6%, compared with just 7% at private banks.

PSB may still fail to maintain the PCA

  1. Despite projections of a recovery, 18 SCBs, including all public sector banks under the prompt corrective action (PCA) framework, may fail to maintain the required capital adequacy ratio under a two SD (standard deviation) shock to the GNPA ratio, unless capital infusion takes place and banks improve their performance, according to RBI’s analysis.
  2. One SD shock equals approximately a two-percentage point increase in the GNPA ratio.
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