India’s financial system remains stable, despite banking sector facing challenges: RBI report

29 Jun 2016 Evaluate

The Reserve Bank of India (RBI) in the thirteenth issue of its half yearly publication -Financial Stability Report (FSR)- June 2016, has said that Indian economy stands out in terms of growth among other emerging markets and the country’s financial system remains stable, though banking sector is facing significant challenges. India stands out amongst its peers in terms of growth, being a net commodity importer and with efforts to improve the ease of doing business.

The report said that as global uncertainties and transiting geopolitical risks impact India, continuation of sound domestic policies and structural reforms remains the key for macroeconomic stability. The FSR has highlighted that business of scheduled commercial banks (SCBs) slowed significantly during 2015-16. The gross non-performing advances (GNPAs) ratio increased sharply to 7.6 per cent from 5.1 per cent between September 2015 and March 2016, largely reflecting reclassification of restructured standard advances as non-performing due to asset quality review (AQR). The restructured standard advances ratio declined but with a marginal increase in the overall stressed advances ratio from 11.3 per cent in September 2015 to 11.5 per cent in March 2016.

The report further said that among other financial institutions, the asset quality of both scheduled urban co-operative banks (SUCBs) as well as non-banking financial companies (NBFCs) has improved. The performance of NBFC sector in general is relatively better than that of PSBs.

The report though cautioned about the downside of extended low oil prices since the third quarter of fiscal 2015 and added that it has provided terms of trade benefit leading to relatively lower imports and reduced external vulnerabilities. It said that India needs to be alert to the risks of commodity price cycle reversals and the economy's vigilance to readjust. FSR said the downside of prolonged low oil prices also needs to be reckoned in terms of likely reduction in private transfers and remittances.

RBI Governor Raghuram Rajan, stressing on the need to continue with sound domestic policies and reforms, said that the banks’ asset quality stress had to be dealt first in order to revive the credit growth. He added that the country needs to deal with legacy issues that hold back growth and bring changes to enhance the efficacy of our business processes and conduct.

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