RBI releases the Financial Stability Report, July 2021

**Executive Summary** The Reserve Bank of India (RBI) released the 23rd issue of the Financial Stability Report (FSR) on July 1, 2021. The report 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 that the gross non-performing asset (GNPA) ratio of SCBs may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario. **Key Points / Main Content** * **Global and Domestic Economic Conditions** * Sustained policy support, benign financial conditions, and increased vaccination are fostering global recovery. * Policy support has helped shore up banks' financial positions, manage non-performing loans, and maintain solvency and liquidity. * The second wave of COVID-19 impacted domestic economic activity, but monetary, regulatory, and fiscal measures have helped manage solvency risks, stabilize markets, and maintain financial stability. * **Banking Sector Performance** * The capital to risk-weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) increased to 16.03% and the provisioning coverage ratio (PCR) was 68.86% in March 2021. * Macro stress tests indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase from 7.48% in March 2021 to 9.80% by March 2022 under the baseline scenario; and to 11.22% under a severe stress scenario. SCBs have sufficient capital, even under stress. * **Future Outlook** * As banks respond to credit demand, they will need to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress. **Impact Analysis** **Banks (Scheduled Commercial Banks - SCBs)** * **Impact:** Increased capital to risk-weighted assets ratio (CRAR). Macro stress tests indicate that the gross non-performing asset (GNPA) ratio of SCBs may increase to 9.80% by March 2022 under the baseline scenario. * **Action Required:** Reinforce capital and liquidity positions in response to credit demand to mitigate potential balance sheet stress. **Financial Entities** * **Impact:** Solvency risk curtailed and stability is maintained due to policy measures. * **Action Required:** N/A.

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