What the RBI Financial Stability Report says about macro risks

  • India Infoline News Service
  • 03 Jan , 2022
  • 7:44 AM
Reserve Bank of India
The RBI Financial Stability Report (FSR) has identified some key macro risks to the Indian economy and the markets. These macro risks arise from the global economic situation, the domestic situation and the structure of the market and the banking system. But, what exactly is this RBI FSR?

The Financial Stability Report (FSR) is published by the RBI twice a year and is more current compared to the Report on Trends and Progress in Banking. The latter tends to become outdated by the time the report is published. That is why the FSR assumes a lot more importance in the Indian macro context. Here are some key risks identified by the FSR.

Global macro risks abound

In calendar year 2021, there is likely to be a positive turnaround across global economies . The advanced economies are likely to see growth revive to 5.2% in 2021 but that will taper to 4.5% in 2022 and further to 2.2% in 2023. In the case of emerging markets, growth is likely to taper from 6.4% in 2021 to 5.1% in 2022 and further to 4.6% in 2023.

The big risk is that once the base effect of the COVID year is overcome, the growth rates are likely to settle at or below its 10-year median growth rates. For India, the big risk will come from sticky fiscal deficit, which is expected to be as high as 7.8% even in year 2026 as per the IMF fiscal monitor.

Transition out of LIBOR

With the London Interbank Offer Rate (LIBOR) likely to be scrapped, Indian has announced the move towards an alternate reference rate (ARR). There are trillions of dollars riding on the LIBOR, so there will be the need for new benchmarks and hedging instruments with sufficient liquidity. This is a big risk for India’s forex borrowings, largely LIBOR-marked.

Commodity risks emanating from oil

Oil still remains the X-factor for the year 2022 and beyond. Some of the statistics are quite revealing. For example, in November, US reported 6.2% retail inflation but energy inflation was 30%. For the developed countries (OECD), total inflation stood at 5.2% of which energy inflation was 24.2%. Clearly, the steep spike in the cost of all forms of fossil fuels including oil and coal are currently posing the biggest commodity risk.

Cryptocurrency risks

The world is waking up to the imminent need to regulate cryptocurrencies in a systematic manner. Private cryptocurrencies pose a risk to the anti-money laundering efforts of various government, including India. These cryptos are also prone to frauds and are highly speculative in nature.

However, the use of cryptocurrencies is rampant and the best governments can do to address this risk is to devise a proper regulatory framework. Cryptos overall have a market cap in excess of $2.8 trillion and are a force to reckon with. They poses a major threat to the ability of central banks to influence the monetary system.

Financing the government deficit

Financing the fiscal deficit will be a big challenge because there is a huge debt repayment coming up. Between 2021 and 2027, total repayment obligations of the centre will surge from Rs.250,000 crore to Rs.610,000 crore. That explains why the fiscal deficit is likely to remain elevated at around 7.8% even in year 2026.

One more problem that India faces is that the revenue deficit as a share of fiscal deficit is now consistently at around 70%. That means a lot of the borrowings are happening just to meet the revenue expenditures of the government. That is hardly a good justification for government debt.

Bank Wholesale credit

In Dec-21, banking credit growth stood at 7.1% against 5.4% last year. However, overall share can be quite misleading unless you look at the components. Out of the incremental credit growth in FY20-21, 64% incremental growth in bank credit came from personal loans and home loans. Trade and agriculture witnessed robust growth in credit too.

However, industry credit contracted -22%. The private sector is preferring NCDs over bank credit. This remains a risk, considering there is a strong correlation between industrial credit growth and GDP growth. The low interest rates also saw a rush of corporates locking themselves in low cost credit via NCDs.

Growth in consumer credit

This is the one segment that has shown good traction in the last 2 years but there is an area of concern here too. The sub-prime enquiries have been growing sharply in recent months. On yoy basis, the growth in credit active customers moderated at the same time. Many of these borrowers have borrowed under the personal loans category; typically from Fintech lenders. As per the latest data from CIBIL, nearly 52% of credit-active customers today are sub-prime with NBFCs and PSBs having a much bigger share of sub-prime borrowers.

To sum it up, India faces the risk of rising sovereign debt and sticky fiscal deficit. The lead indicators of industrial growth like credit growth is currently missing. Also, the surge in sub-prime borrowers post a structural risk to lenders. That remains the big challenge in 2022.

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What the RBI said about soundness of Indian banks

  • India Infoline News Service
  • 03 Jan , 2022
  • 9:38 AM
Soundness of the banking system is judged on a variety of parameters. The RBI Financial Stability Report has evaluated the soundness of scheduled commercial banks in India on a number of parameters like credit growth, asset quality, deposit growth, capital adequacy, credit concentration and profitability.

Here is a quick take on the Indian banking sector.

Growth in deposits of banks in H1

For the half of FY22 ended Sep-21, the deposits growth for all scheduled commercial banks tapered to 9.7%. However, chunk of this growth in deposits came from the CASA (current and savings accounts) deposits. In fact, CASA deposits for banks as a whole grew by a robust 15.4% in the Sep-21 H1. 

The break-up of the deposit growth is interesting. Private banks and foreign banks grew deposits at 13% in the first half while PSBs saw tepid deposit growth of 7.3%. In terms of CASA, it was again the private banks that saw 22.8% growth while private banks lagged at 11.6%, but still sharply higher than Mar-20 period.

Growth in bank Credit in H1

Credit growth lagged the deposit growth during the H1-FY22. Overall credit growth at 6.7% for H1 was higher than the credit growth seen in the previous 3 half-years. Private banks saw credit growth of 10.8% and foreign banks at 16% on a much smaller base. However, PSB credit grew at a paltry 3.5% as lending leeway was still limited.

The composition of credit is clearly stashed in favour of retail credit. For scheduled commercial banks overall, industrial credit led the way with 30.3% but followed closely behind by personal credit at 29%. In short, personal credit in the form of home loans, car loans and personal loans have grown to nearly one-third of overall bank lending.

What about asset quality in the first half?

Asset quality as measured by gross NPAs remains a key metrics for banks. For the Sep-21 H1, gross NPAs were comfortable at 6.9% of loan book. This was at 8.2% in Mar-20 quarter and has turned much better since. PSBs have the highest gross NPAs at 8.8% of the loan book, even as private sector gross NPAs were elevated at 4.6%.

However, situation looks a lot more palatable if you look at net NPAs of the banking system which stands at 2.3% as of Sep-21. Even the net NPAs of PSBs are relatively benign at 3%. That is evident if we look at overall provision coverage ratio (PCR) of 68.1% with substantial provisioning done by private banks and PSBs. Incremental risk looks limited.

Where are the GNPAs concentrated. If you look at the personal loans category where gross NPAs are at 2.5%, the highest incidence of stress is visible in education loans at 7.2%. Other segments like home loans, personal loans and credit cards have gross NPAs of 2-3%.

What about sector-wise industrial NPAs. The maximum NPA share belongs to construction sector at 21.1%, gems & jewellery at 20.7%, engineering goods at 18.1%, mining at 14.3% and food processing at 14.1%. Textiles and infrastructure also had double-digit gross NPAs.

How capital adequacy has shaped up?

This metrics has shown palpable improvement in the first half. Most banks bolstered capital adequacy by issuing Tier-1 and Tier-2 bonds. Capital adequacy has progressively moved higher to 16.6% for scheduled banks overall. Private bank capital adequacy is robust at 18.7% but PSB capital adequacy at 14.4% has improved substantially.

However, the PSBs have some concerns in their Tier-1 (core capital ratio) which is just about 5.5%. However, the Tier-1 capital base of private banks is must more robust at 10.2% and that has left the SCBs as a whole with 7.5% Tier-1 capital adequacy.

Finally, a word on bank profitability

One of the most popular banking metrics; net interest margins or NIMs improved marginally over last 2 years to 3.3%. While NIMs of private banks came down marginally to 4%, PSBs reported NIMs of 2.8%, which is still putting pressure on their profitability.

The biggest shift was visible in ROE. For banking sector overall, ROE has grown from 1.5% to 9.2% in last 2 years. Private banks saw their ROE move up from 4.5% to 10.8%. But more appreciable were PSBs where ROE moved up from -4% to 7.7% over last 18 months.

The slew of rate cuts have pushed the cost of funds of banks down from 5.5% to 4.2% over the last 18 months with the cost of funds of PSBs nearly 40 bps below the cost of funds of private banks. However, this has been matched by a sharp fall in yield on banking assets from 8.5% to 7.2% during this period.

The moral of the story is that SCBs have emerged stronger post the pandemic on most of the parameters. However, the inherent risks in the consumer credit portfolio and the risk of rising bond yields in 2022 will be the factors to watch out for.

What we gathered from the RBI Annual Report FY22

  • India Infoline News Service
  • 30 May , 2022
  • 9:59 AM
The latest RBI Annual Report for the fiscal year ended March 2022 (RBI shifted out of July-June from FY21) comes at a time of great flux. Perhaps, the urge to recover from the lows of COVID-19 impelled global economies to go overboard on monetary and fiscal support. The result was runaway inflation, which is now above the median 4% for over 35 months and above the upper tolerance limit of 6% for six out of last twelve months.

In the US, consumer inflation is at a 42 year high of 8.3% forcing prolonged spells of hawkishness by the Federal Reserve. That cannot come at the cost of GDP growth. It is amidst this state of flux that the RBI presented its annual report for FY22. Here are some major takeaways from the FY22 annual report of the RBI.

What we read about FY22 in the RBI Annual Report

Here is what the RBI annual report laid out about FY22 ended March 2022.
  1. The momentum of the first half of 2021 could not be maintained in the second half due to the emergence of the Omicron virus. This led to fresh round of restrictions and shutdowns leading to a sharp impact on output in the second half.
  2. The slowdown in the Indian economy resulted in equity markets peaking in October 2021. Since then, equity markets have corrected 15%. The damage to start-up digital stocks was much steeper. However, the fall is benign compared to the 30% fall in the NASDAQ and 20% in the S&P 500.
  3. During FY22, manufacturing showed an uptick despite supply chain bottlenecks and weak discretionary consumption.  Manufacturing growth was finally above pre-COVID levels. However, contact intensive services like hotels, trade and transport were tepid.
  4. The big story of FY22 was persistent inflation. Food inflation was caused by supply shocks while fuel inflation was largely imported inflation. However, government has tried to mitigate this impact with a slew of supply side measures.
  5. In the second half of FY22, RBI refrained from providing additional liquidity. It used VRRRs aggressively to rebalance liquidity, absorbing 70% of the overhang. CRR restoration also helped absorb liquidity in FY22.
  6. The central fiscal deficit fell by 250 basis points in FY22 to 6.7%, compared to 9.2% in FY21. This was on the back of graded withdrawal of COVID fiscal stimulus. Robust direct and indirect tax collections also helped.
  7. One of the big drivers of Indian GDP growth in FY22 was international trade. For FY22, the total merchandise exports touched $422 billion while total imports crossed the $1 trillion landmark for the first time. Export mix improved significantly.
  8. During FY22, banks were cushioned by adequate liquidity support by RBI. Bank recapitalization helped bolster risk-taking capacity. GNPAs moderated to 6-year lows while credit is just picking up. However, NBFC asset quality deteriorated.
  9. On the microfinance space, RBI enhanced regulations for customer protection and harmonizing regulations. While the Financial Inclusion (FI) index became a benchmark for MFIs, Digital Payments Index (DPI) represented cash-less financial system.
  10. Regulation has to be followed up with complaint redressal to be effective. RBI launched Integrated Ombudsman Scheme in 2021 for rapid redressal of complaints. DICGC Act was also amended to make deposit insurance payments within 90 days.
In a nutshell, not only did the RBI help smoothen the response mechanism to global crisis in FY22, but also tweaked regulations for greater effectiveness.

How the RBI Annual Report visualizes FY23?

If FY22 was interesting, the RBI Annual Report has rightly pointed out that FY23 could be challenging. To begin with, the impact of the conflict in Ukraine on oil prices and the Indian economy could persist through FY23. Even the IMF has pointed out that the recovery in developed markets would be surer than emerging markets.

RBI pointed out that global growth could be hit by 4 factors viz. US Fed hawkishness, battle lines in Europe, China slowdown and inflation caused by shortages. IMF has downsized GDP growth for developed economies for calendar 2022 from 5.2% to 3.6% and for emerging markets from 6.8% to 3.8%.

According to RBI, the biggest challenge to the world order would be the regulatory conflict for central banks. They need to sharpen countervailing monetary policy to contain inflation. However, this comes at a risk of impeding GDP growth. RBI has also highlighted the risk of Stagflation (weak GDP growth with high inflation) for global economies.

However, RBI is confident of India weathering this macro crisis in FY23. GDP estimates were lowered by 60 bps to 7.2% while inflation projections were raised by 120 bps to 5.7%. Both could get worse before it gets better. However, record agricultural output at 328 million tonnes in FY23 could solve a lot of problems. Despite rising input costs, capacity utilization levels are on the rise India. Meanwhile, the government and RBI are already fighting inflation with a combination of monetary and fiscal measures.

What to read from the RBI data charts?

The table compares key FY22 macro data with FY21 and FY20. Here FY20 is critical as it shows the pre-COVID period. In addition, these numbers are also compared with the 5 year period prior to the global financial crisis (GFC) i.e. FY2004 to FY2008. This is juxtaposed with data for 5 years post the GFC viz. FY2010 to FY2014.
Macro FY22 FY21 FY20 FY04-FY08 FY10-FY14
GDP growth 8.9% -6.6% 3.7% 7.9% 6.7%
Foodgrain (MT) 314.5 308.7 297.5 213.6 248.8
Food Stocks (MT) 74.0 78.0 74.0 18.6 50.1
IIP Growth 11.3% -8.4% -0.3% 9.3% 3.5%
Core Sector 10.4% -6.4% 0.4% 5.9% 5.8%
WPI Inflation 13.0% 1.3% 1.7% 5.5% 7.1%
Central Fiscal Deficit 6.7% 9.2% 4.7% 3.7% 5.4%
Export Growth 51.8% -7.5% -5.0% 25.3% 12.2%
USD – INR 75.8 73.5 75.4 43.1 51.1

Data Source: RBI Annual Report

Let us look at some of the positives emerging from the data. Over the last 20 years what really improved is the food grain production and food stocks. That gives more leverage to manage food supply chains better. Merchandise export growth has been the other big positive with the trade in goods and services now accounting for 45% of GDP.

GDP, IIP and core sector growth are looking attractive in FY22, but that is more due to a negative base. FY23 will give a clearer picture. But the data point that best captures the macro challenge of today is WPI inflation which is way above the 20-year average. Addressing supply chain issues will define India in FY23.


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  • 03 January, 2022 |
  • 5:23 AM

Here is a quick take on the Indian banking sector.

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