**Executive Summary**
The Reserve Bank of India (RBI) released the 22nd issue of the Financial Stability Report (FSR) on January 11, 2021. The report reflects the assessment by the Sub-Committee of the Financial Stability and Development Council (FSDC) regarding financial stability risks and the resilience of the financial system. The release was rescheduled to incorporate the first advance estimates of national income for 2020-21, which were released by the National Statistical Office on January 7, 2021.
**Key Points / Main Content**
* **COVID-19 Impact and Policy Response:**
* Initial policy actions focused on restoring normal functioning and mitigating stress during the pandemic.
* Current focus is on supporting recovery and preserving solvency of businesses and households.
* **Financial Market Performance:**
* Vaccine development has boosted optimism, but the second wave of the virus poses risks.
* Regulatory and government policies ensured smooth functioning of markets and financial institutions.
* Managing market volatility amid rising spillovers is challenging.
* **Banking Sector Performance:**
* Bank credit growth remains subdued.
* Performance parameters of banks have improved due to regulatory dispensations.
* The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved.
* The gross non-performing asset (GNPA) ratio declined, and the provision coverage ratio (PCR) improved.
* **Stress Test Results:**
* Macro stress tests indicate that the GNPA ratio of all SCBs may increase to 13.5% by September 2021 under the baseline scenario, or up to 14.8% under a severe stress scenario.
* Proactive building of adequate capital is needed to withstand asset quality deterioration.
* **Network Analysis:**
* Total bilateral exposures among entities in the financial system increased marginally during the quarter ended September 2020.
* Contagion risk to the banking system declined due to a shrinking inter-bank market and better capitalization of banks.
**Impact Analysis**
**Scheduled Commercial Banks (SCBs)**
* **Impact:** Improved CRAR, reduced GNPA ratio, and improved PCR, however, a potential rise in GNPA ratios under stress scenarios may necessitate higher capital reserves.
* **Action Required:** Proactive building up of adequate capital to withstand potential asset quality deterioration.
**Financial System Entities**
* **Impact:** Marginally increased total bilateral exposures, coupled with decreased contagion risk due to a shrinking interbank market and better bank capitalization.
* **Action Required:** Continue to monitor and manage exposures, while benefiting from reduced systemic risk.
**Regulators and Government**
* **Impact:** Continued challenges in balancing support for economic recovery with management of market volatility and financial stability risks.
* **Action Required:** Continue to support the financial system and maintain regulatory measures while managing the impacts of the second wave of the virus.
Key Entities Referenced
Financial Stability Report (FSR): A report released by the Reserve Bank of India (RBI) that reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability.
Reserve Bank of India: The central bank of India, responsible for releasing the Financial Stability Report (FSR) and regulating the financial sector.
Financial Stability and Development Council (FSDC): Council whose Sub-Committee collectively assesses the risks to financial stability and whose assessment is reflected in the FSR.
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RESERVE BANK OF INDIA
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Department of Communication, Central Office, S.B.S.Marg, Mumbai-400001
Website : www.rbi.org.in
फोन/Phone: 022- 22660502 ई - मेल/email: helpdoc@rbi.org.in
January 11, 2021
RBI releases the Financial Stability Report, January 2021
Today, the Reserve Bank released the 22nd issue of the Financial Stability Report
(FSR), which 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 in the context of contemporaneous issues
relating to development and regulation of the financial sector. The release of FSR
was rescheduled to incorporate the first advance estimates of national income for
2020-21 that were released by the National Statistical Office on January 7, 2021.
Highlights:
• In the initial phase of the COVID-19 pandemic, policy actions were geared
towards restoring normal functioning and mitigating stress; the focus is now
being oriented towards supporting the recovery and preserving the solvency of
businesses and households.
• Positive news on vaccine development has underpinned optimism on the
outlook, though it is marred by second wave of the virus including more
virulent strains.
• Policy measures by the regulators and the government have ensured the
smooth functioning of domestic markets and financial institutions; managing
market volatility amidst rising spillovers has become challenging especially
when the movements in certain segments of the financial markets are not in
sync with developments in the real sector.
• Bank credit growth has remained subdued, with the moderation being broad-
based across bank groups.
• Performance parameters of banks have improved significantly, aided by
regulatory dispensations extended in response to the COVID-19 pandemic.
• The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial
Banks (SCBs) improved to 15.8 per cent in September 2020 from 14.7 per
cent in March 2020, while their gross non-performing asset (GNPA) ratio
declined to 7.5 per cent from 8.4 per cent, and the provision coverage ratio
(PCR) improved to 72.4 per cent from 66.2 per cent over this period.
• Macro stress tests incorporating the first advance estimates of gross domestic
product (GDP) for 2020-21 released on January 7, 2021 indicate that the2
GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to
13.5 per cent by September 2021 under the baseline scenario; the ratio may
escalate to 14.8 per cent under a severe stress scenario. This highlights the
need for proactive building up of adequate capital to withstand possible asset
quality deterioration.
• Network analysis reveals that total bilateral exposures among entities in the
financial system increased marginally during the quarter-ended September
2020. With the inter-bank market continuing to shrink and with better
capitalisation of banks, the contagion risk to the banking system under various
scenarios declined as compared to March 2020.
(Yogesh Dayal)
Press Release: 2020-2021/922 Chief General Manager