FINANCIAL STABILITY

  A stable  financial system  is  capable of  efficient  resource  allocation, assessment and management of financial risks and maintaining both economic  growth and employment generation. Financial stability provides  adequate mechanism for pricing, allocating and managing financial risks like  credit, liquidity, counterparty,market risks etc .Financial system is  considered to be stable when there is no major disruption in market transactions without significant  deviation of financial asset prices  from economic fundamentals enabling economic agents to mobilise and operate funds with confidence.In this  context it has been observed that the "Financial Stability Report 2022-23 "released by Reserve Bank of India recently indicated that Scheduled commercial banks (SCBs) asset quality improved in most of the sectors . Despite Indian economy confronting with strong global headwinds,yet sound macro economic fundamentals and healthy financial and non financial sector balance sheets are providing strength and resilience and engendering financial system stability. Buoyant demand for bank credit and signs of revival in investment are benefitting for improved asset quality, return to profitability, and strong capital and liquidity buffers of SCBs. Macro stress tests for credit risks revealed that SCBs would be able to comply with the minimum capital requirements even under severe stress scenario, the system level capital to risk weighted asset ratio (CRAR) is estimated for September 2023 under baseline, medium and severe stress scenarios as at 14.9%, 14.0% and 13.1 respectively.

 It may be recalled here during the two waves of covid 19, RBI has announced Resolution Framework 1.0 and 2.0 to provide relief to borrowing and lending institutions through restructuring of large borrowed accounts  under RF 1.0 and implemented within 180 days till September 30 2022.Under RF 2.0 resolutions for individuals, small business and MSMEs  were invoked for 90 days.With the expiry of suspension on fresh proceedings under Insolvency and Bankruptcy Code (IBC) on March 24, 2021,creditors can again leverage on the IBC mechanism for resolution of stressed assets, which is also expected to strengthen MSMEs - as operational creditors - to recover their dues.Similarly the setting up of National Asset Reconstruction Company Limited (NARCL) to take over the stressed debt from banks is a step forward for resolution of large value legacy assets, international experience shows that inorder to succeed it requires to be independent and professional devoid of perverse incentives.

Despite the global slow down in growth and trade,increase in both inflationary tendencies and bank rate, report  based on recent data showed that the Indian economy has so far presented a'picture of resilience' with its financial markets functioning smoothly basically on account of high capital buffers and low non performing Assets(NPA).The Gross non performing Assets (GNPA) ratio of Scheduled commercial banks (SCBs) declined to a seven year low of 5% in September 2022,and the net non Performing assets (NNPAs) ratio stood at a10 year low of  only 1.3%.wherein private banks NNPA ratio was below 1%.The quarterly slippage ratio which had been rising till December 2021 cooled off during Q2 of FY 23 with considerable contribution by public sector banks.SCBs' asset quality continued to improve across majority sectors. Similarly the share of large borrowers in gross advances of SCBs in total GNPA came down from 75.6% in September 2020 to 62.2% in Sep and GNPA ratio of large borrowersg correspondingly stood at 6.4% in September 2022. Government finances are more or less on a consolidation path and the country is sitting on low leverage making them less vulnerable to fall out of global tightening. 

Some experts like Jefrey Frankel opine that there is 50% chance of recession in 2023 especially in Advanced economies due to rapid interest rate hikes by US Federal Reserves  and other central banks,soaring energy prices in Europe, Russia Ukraine conflict and collapsing property sector and surging covid cases in China. On the other hand RBI Governor opine that South Asian region which contributed 15 % of global GDP and 20% of remittances will be the global growth center of the world with India, Bangladesh, and Maldives accounting for highest growth. However the challenges of controlling inflation, food and energy crisis,supply chain disruptions, and especially import of fossil fuels remains to be tackled effectively. Inspite of the fact that unlike China India Is less integrated with the world economy but our foreign exchange buffers ($562.8 billion as on December 31 2022) remittances and services exports are continuously buttressing our current account balance. Similarly India is in the process of achieving widening  tax buoyancy  on account of pent up demand, growth of nominal GDP, and better compliance leading to increase tax revenue .However current account deficit, fiscal deficit and inflation continues to be a matter of concern.Interestingly contrary to the global scenario NSO recently projected  7% GDP growth in India for the year 2022-23 as against 8.7 % growth achieved for 2021-22. In any case the projected decline in growth of advanced economies including USA, European union along with disruptions in Chinese economy may impinge trade, investments and financial flows across the globe. However further momentum in domestic demand, private consumption,savings , investments employment and tax buoyancy can not only insulate Indian economy against chances of recession but maintain financial stability.