RBI releases the Financial Stability Report, December 2021

**Executive Summary** The Reserve Bank of India (RBI) released the 24th issue of the Financial Stability Report (FSR) on December 29, 2021. The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the financial system. Macro stress tests indicate a potential increase in the gross non-performing asset (GNPA) ratio of SCBs by September 2022. **Key Points / Main Content** * **Global Economic Recovery:** * The global economic recovery has lost momentum in the second half of 2021 due to resurfacing COVID-19 infections, the Omicron variant, supply disruptions, elevated inflationary levels, and shifts in monetary policy. * **Domestic Economic Recovery:** * Progress in vaccination has enabled domestic recovery after the second wave of the pandemic. * The corporate sector is gaining strength, and bank credit growth is improving. * **Scheduled Commercial Banks (SCBs):** * The capital to risk-weighted assets ratio (CRAR) of SCBs rose to a new peak of 16.6% in September 2021. * The provisioning coverage ratio (PCR) stood at 68.1% in September 2021. * **Macro Stress Tests for Credit Risk:** * Macro stress tests indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase from 6.9% in September 2021 to 8.1% by September 2022 under the baseline scenario and to 9.5% under a severe stress scenario. * SCBs would have sufficient capital even under stress conditions. * **Emerging Stress Areas:** * Emerging signs of stress in micro, small, and medium enterprises (MSME) and the microfinance segment require close monitoring of these portfolios. **Impact Analysis** **Scheduled Commercial Banks (SCBs)** * **Impact:** Potential increase in GNPA ratio requires capital management and monitoring of credit risk. * **Action Required:** Manage capital to withstand potential stress and closely monitor credit risk, especially in MSME and microfinance portfolios. **Micro, Small, and Medium Enterprises (MSME) & Microfinance Sector** * **Impact:** Potential for increased financial stress and non-performing assets. * **Action Required:** Enhanced monitoring of portfolios and proactive measures to mitigate financial distress. **Financial Stability and Development Council (FSDC)** * **Impact:** Informs the FSDC's overall assessment of risks to financial stability. * **Action Required:** Use the report's findings to inform policy decisions and strategies to maintain financial stability and resilience.

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