Financial Stability Report (FSR) 2018

Meaning of financial stability

Importance of financial stability

Causes of financial instability

What is financial stability report

Financial Stability Report December 2018

Meaning of financial stability

Financial Stability is a condition in which the three components of the financial system – financial institutions, financial markets and financial infrastructure are stable. It means that if a financial system is capable to speed up the real economic activities smoothly and is capable of mitigating financial imbalances arising from internal and external socks, is marked as financially stable.

Importance of financial stability

 The financial system plays a critical role in the economy. Financial instability may lead to a financial crisis with adverse result for the economy. The same happened at the end of 1990’s and later in 2007 when our country faced the economic crises during the time of global financial crises. Now, financial stability is a core objective of monetary policy of RBI. it is important to-

  • To Achieve Policy goal of the central bank (monetary policy making)
  • To build a healthy economy and achieve sustainable growth
  • To keep financial institutions healthy and stable
  • For price stability
  • In the absence of financial stability, making rational decisions becomes difficult and Efficiency of resource allocation is reduced.

Causes of financial instability

  • Rapid liberalization of the financial sector
  • Inadequate economic policy
  • Non-credible exchange rate mechanism
  • Inefficient resource allocation
  • Weak supervision
  • Insufficient accounting and audit regulation
  • Poor market discipline

What is financial stability report

 International financial crises of 1990 and 2007 prompted the need for analysis and reliable picture of condition of a country’s financial sectors. To assess financial stability situation in the country, the central bank of India- RBI is publishing “India Financial/Fiscal Stability Report” since 2010 on half-yearly basis. The FSR reflects the collective assessment of the sub-committee of the financial stability and development council (FSDC) which was set up to deal with macro prudential and financial regularities in the entire financial sector of India. FSDC takes inputs from financial sectors regulators i.e. RBI, SEBI, PFRDA, IRDAI including ministry of finance. 

Financial Stability Report December 2018

The Reserve Bank of India on 31 Dec. 2018 released the 18th issue of the Financial stability report (FSR).

Highlights of the report:

Overall assessment of systemic risks

  • India’s financial system remains stable
  • the banking sector shows signs of improvement, even though the global economic environment and the emerging trends in financial sector pose challenges.

Global and domestic macro-financial risks:

  • The global growth outlook for 2018 and 2019 remains steady although the underlying downside risks (like trade war and protectionism) have risen.
  • Spill-over risk to emerging economies endangered by tightening of financial conditions in Advanced Economies, protectionist trade policies and global geopolitical tension has significantly increased.

The rotational effects of stricter imposition of global trade and investment rules, weaker financial conditions of some economies and global politics challenges has increased and put its influence on the world economy.

  • The gradual [simple_tooltip content=’It is the process by which the monetary authority of a country, generally the central bank, controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.’] monetary policy [/simple_tooltip]normalization in advanced economies (AEs) as also the uncertainty in global trade regime may adversely affect capital flows to emerging markets (EMs) and exert upward pressure on EM interest rates and corporate spreads.
  • In domestic financial markets, structural shifts in credit intermediation and the evolving interconnectivity between banks and the non-banks call for greater vigilance.

The shift in credit intermediation from banks to non-banks has given the corporate sector a diverse choice of financing instruments. The role of banks and non-banks in supporting the growth needs of an emerging economy like India is well recognized.

There was capital infusion in banks, leading to an improved credit expansion in September 2018, Non-banking financial companies (NBFC) had also increased their lending activities, the relative proportion of domestic bank and non-bank resources was almost evenly matched. Mutual funds (MFs) had emerged as one of the largest financial intermediaries in providing funds.

Financial Institutions: Performance and Risks

(1) Improvement in Gross non-performing assets (GNPA):

The asset quality of banks showed an improvement with the [simple_tooltip content=’Gross non-performing asset refer to the sum of all the bad loans for which interest is not been realized for more than 90 days.’]gross non-performing assets[/simple_tooltip] ratio of [simple_tooltip content=’The scheduled commercial banks are those banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services.’]Scheduled Commercial Banks [/simple_tooltip] (SCBs) declining from 11.5% in March 2018 to 10.8 % in Sep. 2018.

Declining GNPA is a positive sign for the economy as it shows that bank’s bad debts are decreasing.

Under the baseline scenario, GNPA ratio may decline from 10.8 per cent in September 2018 to 10.3 per cent in March 2019.

 (2) credit growth:

[simple_tooltip content=’It is the total amount of funds financial institutions provide to an individual or business. A business or individual’s bank credit depends on the borrower’s ability to repay and the total amount of credit available in the banking institution.’]Credit growth[/simple_tooltip] of scheduled commercial banks (SCBs) has improved between March 2018 and September 2018, driven largely by private sector banks. It was 21.3% in March 2018 and improved to 22.5% in September 2018.

credit growth is a good sign for the economy and for any financial institution.

(3) Growth of Gross Domestic Product (GDP):

On the domestic front, growth of [simple_tooltip content=’Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time.’]Gross Domestic Product [/simple_tooltip] (GDP) showed slight moderation in Q2 (quarter 2: July-September): 2018-19 (with 7.1%) while inflation remains contained.

It is a chief factor in examining a country’s economic health. When the GDP is growing, a country is generally improving economically.

Inflation rate is under control in this quarter as it is 3.7% in September, 3.69 in August and 4.17 in July.

(4) Analysis of the financial network structure for the period September 2017 – September 2018 reveals a shrinking inter-bank market and increasing bank linkages with asset management companies-mutual funds (AMC-MFs) for raising funds and with NBFCs/Housing Finance Companies (HFCs) for lending

There was capital infusion in banks, leading to an improved credit expansion in September 2018, Non-banking financial companies (NBFC) had also increased their lending activities, the relative proportion of domestic bank and non-bank resources was almost evenly matched. Mutual funds (MFs) had emerged as one of the largest financial intermediaries in providing funds. Same way loans and advances of NBFC sector increased by 16.3 percent and investments increased by 14.1 percent.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *