RBI releases Financial Stability Report: December 2011 - ஆர்பிஐ - Reserve Bank of India
RBI releases Financial Stability Report: December 2011
The Reserve Bank of India presented its half-yearly assessment of the health of India’s financial sector in its Financial Stability Report (FSR), released here today. The FSR embodies the Reserve Bank’s continuing endeavour to communicate its assessment of the incipient risks to financial sector stability. The FSR was first released in March 2010, followed by December 2010 and June 2011. The FSR holistically assesses soft spots in India’s financial sector from a systemic perspective. It outlines the key risks arising from macroeconomic environment, financial markets and institutions and regulatory and other infrastructure. It also seeks to assess the position in respect of continuing vulnerabilities even as new ones are emerging. There are two distinguishing features of this FSR vis-à-vis the earlier ones. It represents the collective views of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to systemic stability and hence is a more holistic assessment of financial stability. The FSR also showcases the Reserve Bank’s endeavour to constantly upgrade its tools to identify and measure systemic risk through a new chapter describing them. In addition, stability maps and indicators have been designed for every segment to present a bird’s eye view of the assessment of risks and their evolution in various segments over the previous period. Highlights:
Macroeconomic Environment
Financial Markets
Financial Institutions – Soundness and Resilience
Payment and Settlement Systems
Cross-sectional Exposures
Distress Dependencies between Banks
Details Domestic financial system remains stable despite some soft spots The FSR observes that the domestic financial system remains stable in the face of an adverse international backdrop. Market participants and stakeholders in India reposed their confidence in the stability of the domestic financial system and stringent stress testing brought out the resilience of the system. FSR, however, points out some soft spots that need to be addressed, going forward. The poorer global growth prospects and sovereign debt crisis in Europe have heightened external sector vulnerability. At the same time, domestic growth has weakened, while inflation has remained high. Exchange rate depreciation has inflationary implications through the increase in the cost of oil and other imported goods which are inputs in overall production. The increase in petrol and diesel prices and minimum support prices, have a cascading effect on the entire economy, and appear to be neutralising the demand, moderating impact of the monetary policy measures. Inflationary expectations, which continue to remain high, also cause stickiness in the downward movement of the price level. Further, the fiscal situation remains challenging as the revenue collection were lower than expected in the first half of the current year. Volatility in financial markets needs monitoring Indian financial markets have experienced higher than normal levels of volatility and uncertainty. The reliance of domestic firms on international sources of finance denominated in foreign currency has been growing on account of interest rate differentials, among other things. The recent depreciation of the Indian rupee would test the resilience of those firms in the corporate sector’s having currency mismatches on their balance sheets. The equity market has corrected lower during the period too. The evolving equity market microstructure, namely, derivatives trading which surged not accompanied by higher cash market turnover and rise in share of proprietary trading in derivatives segment need to be monitored. Slight decline in capital adequacy and rise in NPAs; Yet, Indian banks robust According to FSR, Indian banks remain robust, notwithstanding a small decline in capital adequacy and rise in NPA levels, mainly in retail, real estate, infrastructure and priority sectors, in the recent past. The growth rate of credit to power sector has been much higher than the aggregate banking sector’s credit growth and could unravel in case of a sharp economic downturn. The rapid spread of contagion from the European sovereign bond markets to international banks could trigger further deleveraging. This could raise the cost of foreign currency borrowing for both, Indian banks and firms. A slowdown in domestic growth could also raise the risks for the banking system. While Indian banks will migrate to Basel III from a position of strength, the new standards may require adjustments in lending behaviour. To assess the resilience of institutions, a number of stress tests were carried out on scheduled commercial banks. The stress tests assessed banks’ vulnerabilities and resilience to credit concentration, liquidity, foreign exchange, interest rate and equity price risk. Various macro stress tests on system level asset quality were also performed. For the first time, bank group wise macro stress test based on panel regression and sector wise macro stress test based on multivariate regression have been attempted in this FSR. This exercise indicated that the banks are reasonably resilient though capital adequacy of some individual banks does get affected under severe credit risk stress scenarios. The FSR has noted that the regulatory arrangements are being strengthened, emphasising a coordinated approach, in line with the current international developments and best practices. The financial market infrastructure continued to function without any major disruption. The payment and settlement systems remained robust but trends in intraday liquidity may need to be monitored, FSR observes. New tools for risk assessment Recognising the critical importance of supplementing the assessment of systemic risks through a wider consultation, this FSR has introduced some new tools for risk assessment. These are Systemic Risk Survey and Systemic Liquidity Indicator in addition to network model introduced in last FSR. The Systemic Risk Survey was conducted of select individuals from banks, financial institutions, insurance companies, asset management companies, non-banking financial companies, primary dealers and broking firms. The survey identified deterioration in the asset quality of banks as the most significant risk to the financial system followed by risks from heightened market volatility, including exchange rate volatility, global risks, risks from high inflation and high interest rates. The Systemic Liquidity Indicator (SLI), showed that there was moderate increase in funding difficulties in September and October, 2011. A network model (introduced in the previous FSR), which sought to analyse the contagion risks arising from an initially idiosyncratic problem that becomes more widespread, has been upgraded in this FSR to include an assessment of the interconnectedness in the entire financial system and to further probe into the nature of the network of the banking system and of the financial system. The analysis showed that the Indian banking system remains clustered and is also distinctly tiered. It also showed that Insurance and mutual fund sector, being the liquidity providers are vulnerable to any disturbances in the banking system. Stability measures too have been enhanced to model the distress dependencies in the banking sector, among specific groups of banks and that associated with an individual bank. Finally, a series of macrofinancial stress tests were done to focus on the impact of macroeconomic shocks on the financial system recognising the fact that the worsening of credit risk conditions is one of the most dominant sources of bank risk. The probability of distress of entire banking system was observed to be very low during the recent period. Also, the expected number of banks that become distressed given that at least one bank becomes distressed has been low and stable for the last one and half years. The next FSR is scheduled to be published in June 2012. Alpana Killawala Press Release: 2011-2012/984 |