RBI releases the Financial Stability Report, June 2023

**Executive Summary** The Reserve Bank released the 27th issue of the Financial Stability Report (FSR) on June 28, 2023. 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 Indian financial system. Macro stress tests project that Scheduled Commercial Banks (SCBs) can comply with minimum capital requirements under stress scenarios in March 2024. **Key Points / Main Content** * **Economic Context:** * The global economy faces heightened uncertainty due to banking system fragility, geopolitical tensions, and elevated inflation. * The Indian economy and domestic financial system remain resilient due to strong macroeconomic fundamentals. * Continuing growth momentum, moderating inflation, narrowing current account deficit and rising foreign exchange reserves support sustained growth. * Healthy bank and corporate balance sheets are supporting a new credit and investment cycle. * **Banking Sector Performance:** * The capital to risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) ratio of SCBs rose to historical highs in March 2023 (17.1% and 13.9%, respectively). * SCBs' gross non-performing assets (GNPA) ratio continued its downtrend to a 10-year low of 3.9% in March 2023, with the net non-performing assets (NNPA) ratio declining to 1.0%. * SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level capital to risk-weighted assets ratio (CRAR) in March 2024, under baseline, medium and severe stress scenarios, is projected at 16.1 per cent, 14.7 per cent and 13.3 per cent, respectively. **Impact Analysis** **Scheduled Commercial Banks (SCBs)** * **Impact:** Banks will have to maintain sufficient capital to meet regulatory requirements, even under stressed economic conditions. They are experiencing improved asset quality. * **Action Required:** Banks should continue to monitor and manage asset quality and maintain adequate capital buffers as per regulatory guidelines. **Indian Economy** * **Impact:** The Indian economy is shown to be resilient despite global challenges, with positive trends in growth, inflation, and external balances. * **Action Required:** Maintain a robust financial system. **Financial Stability and Development Council (FSDC)** * **Impact:** The Sub-Committee's assessment of risks to financial stability and the resilience of the Indian financial system reflects the collective assessment of the risks. * **Action Required:** Continue monitoring and reporting on financial stability.

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