RBI transfer of funds to the government
This was, perhaps the most important part of the RBI annual report. A day before the presentation of the annual report, the RBI had approved transfer of Rs176,000cr to the government. Out of this transfer, Rs123,000cr was by way of dividends while Rs53,000cr was by way of return of excess capital from the contingency reserve. The dividend amount alone was double of last year and that was driven by interest earned by the RBI on nearly Rs3 trillion worth of OMO (Open market operations) done by the RBI. During the year, nearly 70% of the government bonds have devolved on the RBI and that had boosted interest income of the RBI. This dividend also includes surplus out of trading profits from currencies and fees for printing notes and minting coins. The net impact of the return of capital was that the RBI contingency reserve has fallen from Rs232,000cr to Rs196,000cr. This fund transfer is likely to boost government revenues in a much bigger way.
Toning down of NPAs in the banking system
The RBI annual report also underlined that the gross NPAs of the banking system as of March 2019 had come down to 9.1% from 11.2% in March 2018. This sharp fall in NPAs was driven by lower spillages in loans during the year and also better recoveries from the NCLT process. However, there is some cause of worry for the banks in the sense that the bank frauds during the year were up 15% at Rs71,543cr and this figure has grown almost 5 times in the last five years. The RBI reported a total of 6,801 cases of fraud during the fiscal year.
NBFCs witness sharp fall in lending books
The RBI annual report has also highlighted that the NBFC funding books have shrunk sharply in the post IL&FS scenario. IL&FS had gone virtually bankrupt last year and this was followed by a serious liquidity crisis in Dewan Housing. These two NBFCs owe nearly Rs2 trillion and that has resulted in NBFCs finding it hard to raise funds at competitive rates. The RBI annual reported underlined that during the fiscal year 2018-19 NBFC credit to the commercial sector had actually dipped by 20%.
Growth outlook remains muted
The RBI annual report has raised some red flags over the GDP growth and has downsized the full year GDP growth for 2019-20 to 6.9%. Even this projection is based on an optimistic recovery in the second half of the year as the RBI is anticipating an average growth of 6.4% in the first half and about 7.4% average in the second half. The report has specifically pointed out that the fall in GDP is driven by insufficiency of demand with consumption driven sectors taking a major hit. However, on the positive side the RBI has also pointed out that this slowdown in demand was more likely cyclical than structural. That also implies that stimulus measures may not be really effective in boosting growth and that could drive the strategy on the fiscal front.
Currency in circulation gets a big boost
One of the key highlights of the RBI annual report was that the currency in circulation had increased by 17% to Rs.21.1 trillion. This is substantially more than the pre-demonetization levels of currency in circulation and that should obviate any discussions on a liquidity crunch driving down demand.
The RBI report has raised some red flags on growth and on NBFC credit. However, the banking NPAs have come down sharply and currency in circulation has improved. The big question remains whether the RBI can repeat the government transfer performance next year too?