The Reserve Bank of India (RBI) recently released its 18th Financial Stability Report (FSR). This regular biannual publication reviews the nature, magnitude, and implications of risks that have potential impact on the macroeconomic environment, financial institutions, markets and infrastructure. Moreover, the report also evaluates the resilience of the financial sector through stress tests.
What is a Financial Stability Report?
A FSR is an assessment of the economy’s vulnerabilities and potential threats to financial stability. These reports are prepared by the Reserve Bank of India and represent the collective judgment of the Sub-Committee of the Financial Stability and Development Council (FSDC) about the risks present in the financial stability of the country and the resilience of the financial system.
An Overview of Stress Tests
Stress tests are beneficial tools used to determine how certain unfavorable economic events such as a deep recession or financial crisis could impact a company, industry, or portfolio. They are usually computer-generated simulation models that test hypothetical scenarios.
Key Findings From the 18th FSR
The report suggests that India’s financial system is stable with signs of improvement in the banking sector even amidst challenging global economic environment and emerging trends in the financial sector. The reasons for these positive signs include credit growth of banks accompanied by the improvement in asset quality.
Table of Data
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| Factor | Value |
|---|---|
| GDP growth | 7.1% |
| Inflation | 2% |
| Gross Fixed Capital Formation growth | Positive |
| Credit growth of commercial banks | Improved |
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About Gross Fixed Capital Formation
Gross fixed capital formation (GFCF) refers to the net increase in physical assets (investment minus disposals). It is a component of expenditure approach to calculating Gross Domestic Product (GDP). However, it does not include the value of all kinds of financial assets, as well as stocks of inventories and other operating costs.
Challenges in the Banking Sector
Despite improvements, state-owned banks still hold higher levels of bad loans than their private sector counterparts. In addition, data on banking frauds raise concerns as nearly 95% of the reported frauds in the last six months were credit-related, primarily affecting Public Sector Banks. Government’s recommended solution includes reforms in governance, recapitalization support for weaker public sector banks and improved coordination between financial sector regulators.
The Role of Financial Stability and Development Council
The Financial Stability and Development Council was established by the Government in December 2010. The primary aim of the FSDC is to maintain financial stability, enhance inter-regulatory coordination and promote financial sector development. The council is headed by the Finance Minister and its members include heads of all Financial Sector Regulators, Finance Secretary, Secretary of Department of Economic Affairs, and the Chief Economic Adviser. In May 2018, the government reconstituted FSDC to include additional members from different sectors.
