Financial Stability Report FSR December 2024
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Questions and Answers

Which of the following is NOT a potential risk to financial stability posed by artificial intelligence (AI) in finance?

  • AI's potential to reduce the demand for skilled labor in the financial sector, leading to unemployment and economic instability (correct)
  • Increased concentration of AI technology and service providers leading to systemic risks
  • AI-driven trading strategies amplifying market stress through correlated actions and feedback loops
  • AI's ability to generate realistic deepfakes leading to increased cybersecurity risks

What is the primary reason for the heightened risk of shocks spreading from emerging market and developing economies (EMDEs) to banks?

  • The use of crypto-assets and stablecoins by EMDEs, which can weaken monetary policy and divert resources
  • The increasing exposure of banks to government bonds in EMDEs, creating a stronger sovereign-bank nexus (correct)
  • The rapid growth of the real estate market in EMDEs, which increases the risk of property bubbles and financial instability
  • Increased government spending and investment in EMDEs leading to higher sovereign bond yields

What is the 'black box' problem associated with AI models in finance?

  • The potential for AI models to be biased, leading to unfair or discriminatory outcomes
  • The lack of transparency and understanding in how complex AI models arrive at their decisions (correct)
  • The risk that AI models may be used for illegal or unethical purposes, such as insider trading or fraud
  • The difficulty in obtaining and processing high-quality data for AI models, leading to unreliable predictions

Which of the following factors is NOT mentioned in the content as a potential contributor to financial stability risks in the context of crypto-assets and stablecoins?

<p>The potential for crypto-assets to serve as a safe haven asset during times of economic uncertainty (A)</p> Signup and view all the answers

What is the primary concern regarding the widespread use of tokenization in finance?

<p>The potential for tokenization to increase the interconnectedness between traditional finance and decentralized finance (DeFi), potentially causing spillovers to the broader financial system (C)</p> Signup and view all the answers

Which of these is NOT a factor contributing to India's economic growth in 2024-25?

<p>High levels of foreign direct investment (FDI) into the Indian economy (A)</p> Signup and view all the answers

Which of these scenarios presents high risk to financial stability?

<p>High equity valuations and low credit spreads (C)</p> Signup and view all the answers

What is the new minimum contract size for index derivatives, as outlined in the "Measures to Strengthen Equity Index Derivatives Framework" section?

<p>₹15 lakh (D)</p> Signup and view all the answers

Which of the following is NOT a revised eligibility criterion for equity derivatives, as stated in the "Review of Eligibility Criteria for Entry/Exit of Stocks in Derivatives Segment" section?

<p>Average Daily Trading Volume (ADTV) (D)</p> Signup and view all the answers

According to the 'Review of Small and Medium Enterprises (SME) framework' section, what is the new limit on Offer for Sale (OFS) by shareholders in an SME IPO?

<p>20% of the issue size (B)</p> Signup and view all the answers

Which of the following is NOT a key change outlined in the 'Review of Small and Medium Enterprises (SME) framework' section, related to SME IPOs?

<p>Requiring issuers to have a minimum net profit of ₹5 crore in two of the last three financial years (B)</p> Signup and view all the answers

What is the primary factor driving the growth of mutual fund assets under management (AUM) in India in 2024-25?

<p>Growth in equity schemes, particularly sectoral and thematic schemes (C)</p> Signup and view all the answers

What is the primary purpose of the Cybersecurity and Cyber Resilience Framework (CSCRF), introduced by SEBI for regulated entities?

<p>To strengthen IT infrastructure and data protection at regulated entities (A)</p> Signup and view all the answers

Which of the following best describes the current state of the microfinance sector in India?

<p>Slowing growth in credit accompanied by increasing loan defaults (A)</p> Signup and view all the answers

Which factor has contributed to the slowing growth of NBFC loan growth in India by September 2024?

<p>Increased risk weights on certain NBFC and bank loans (A)</p> Signup and view all the answers

What is indicated by the increasing write-offs reported by some outlier NBFCs?

<p>Potential for growing credit risk in the NBFC sector (D)</p> Signup and view all the answers

Which of the following best describes the impact of Systematic Investment Plans (SIPs) on the mutual fund sector in India?

<p>SIPs have been a major driver of growth in mutual fund AUM, promoting financialization of household savings. (B)</p> Signup and view all the answers

What is the Capital to Risk-Weighted Assets Ratio (CRAR) for the NBFC sector as of September 2024?

<p>26.1% (C)</p> Signup and view all the answers

Which of the following is a key parameter used to assess the performance of scheduled commercial banks (SCBs) in India?

<p>Concentration of large borrowers (C)</p> Signup and view all the answers

Which segment of NBFCs has experienced strong growth in retail lending?

<p>Middle-layer NBFCs (C)</p> Signup and view all the answers

What is the Net Interest Margin (NIM) for the NBFC sector as of September 2024?

<p>5.1% (C)</p> Signup and view all the answers

Which of the following is NOT a key factor affecting the credit growth in the microfinance sector in India?

<p>Reduced regulatory oversight (B)</p> Signup and view all the answers

Based on the provided information, identify the most accurate statement regarding the projected trend of India's general government debt and fiscal deficit in the medium term.

<p>They are expected to gradually decrease and align with the EMDE average due to ongoing fiscal consolidation. (A)</p> Signup and view all the answers

Which of the following factors is NOT mentioned as a reason for the strengthening resilience of India's domestic banking system?

<p>Increased government spending on infrastructure projects (A)</p> Signup and view all the answers

How does the interest payment to revenue receipts ratio in 2024-25 compare to that in 2023-24?

<p>The ratio is expected to decrease slightly, from 39.1% to 37.2%. (C)</p> Signup and view all the answers

Which of the following is NOT a factor contributing to the projected increase in the states' consolidated fiscal deficit (GFD) in 2024-25?

<p>Increased revenue from taxes (B)</p> Signup and view all the answers

What is the medium-term goal for India's outstanding liabilities, as stated in the document?

<p>To reduce it to the 20% threshold recommended by the FRBM Review Committee. (C)</p> Signup and view all the answers

Based on the data as of March 2024, what percentage of household financial liabilities are attributed to individuals?

<p>91% (C)</p> Signup and view all the answers

Which of the following is TRUE about India's household debt compared to other emerging market economies?

<p>India's household debt is relatively low compared to other EMEs. (B)</p> Signup and view all the answers

What is the regulatory requirement for the Common Equity Tier 1 (CET1) ratio in India's banking system?

<p>8.0% (D)</p> Signup and view all the answers

Which of the following statements about the banking system in India is NOT supported by the provided information?

<p>The banking system's resilience is weakening due to declining asset quality. (D)</p> Signup and view all the answers

Which of the following is NOT a reason why the RBI is engaging with foreign regulators like ESMA?

<p>To prevent circumvention of Minimum Public Shareholding (MPS) norms (B)</p> Signup and view all the answers

According to SEBI's framework, how are perpetual bonds held by mutual funds valued?

<p>At the lowest of the values obtained by considering multiple call dates or a deemed maturity of 100 years from issuance (D)</p> Signup and view all the answers

Which of the following is NOT a type of entity regulated by SEBI?

<p>Foreign Portfolio Investors (FPIs) (C)</p> Signup and view all the answers

What is the primary objective of the RBI's directive to supervised entities (SEs) regarding gold loans?

<p>To ensure compliance with guidelines and prevent potential risks associated with gold loans (B)</p> Signup and view all the answers

What prompted SEBI to mandate detailed disclosure of ownership and economic interest for certain FPIs?

<p>To prevent circumvention of Minimum Public Shareholding (MPS) norms (B)</p> Signup and view all the answers

What is the primary aim of the scheme to ease access for non-resident investors via IFSC in investing in Sovereign Green Bonds (SGrBs)?

<p>To attract foreign investment and enhance global climate capital flows into India (C)</p> Signup and view all the answers

Which of the following entities is NOT prohibited from associating with ‘finfluencers’ providing investment advice or recommendations?

<p>Mutual funds (C)</p> Signup and view all the answers

What is the key rationale behind the SEBI's regulation on ‘finfluencers’?

<p>To protect investors from misleading or unqualified advice (D)</p> Signup and view all the answers

Which of the following is NOT a requirement for FPIs holding over 50% of their Indian equity AUM in a single corporate group?

<p>They must obtain prior approval from the RBI before investing (B)</p> Signup and view all the answers

What is the primary purpose of the SEBI's regulation on valuation of perpetual bonds held by mutual funds?

<p>To standardize the valuation of these bonds across different mutual funds (C)</p> Signup and view all the answers

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Flashcards

Sovereign-Bank Nexus

The interconnected relationship between banks and the government, affecting financial stability.

Emerging Markets and Developing Economies (EMDEs)

Countries with lower economic development but increasing growth potential.

Corporate Bond Valuations

The market value of corporate bonds, which can fluctuate based on interest rates and economic conditions.

Crypto-Assets Impact

The influence of cryptocurrencies on monetary policy and financial stability, often bypassing controls.

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AI in Finance Risks

Challenges posed by artificial intelligence in finance, including bias and system opacity.

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Market Volatility from AI

Fluctuations in financial markets caused by correlated AI-driven trading strategies.

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India's Economic Growth

Projected GDP growth of 6.6% driven by government spending and rural consumption.

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Yield-to-Call basis

Method for valuing Additional Tier-1 (AT-1) bonds used by mutual funds.

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Minimum contract size for index derivatives

Increased from ₹5 lakh to ₹15 lakh, adjusting contract value range.

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Eligibility criteria for equity derivatives

Revised to include high-quality stocks based on market metrics.

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Stress Testing Framework

New methods to measure tail risks and define default fund size for equity derivatives.

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Cybersecurity and Cyber Resilience Framework (CSCRF)

SEBI's guidelines aimed at improving IT security for regulated entities.

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Interest Payment to Revenue Ratio

The ratio of interest payments to total revenue receipts, projected to decrease to 37.2% in 2024-25.

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Consolidated Fiscal Deficit

The overall shortfall of a state’s budget, projected to increase slightly to 3.2% of GDP in 2024-25.

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Revenue Deficit

The shortfall when revenue receipts are less than revenue expenditure, expected to remain at 0.2% of GDP.

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Outstanding Liabilities

Debts and obligations that states have; expected to decrease from 31.0% to 28.8% of GDP by March 2025.

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FRBM Review Committee Goal

The medium-term goal to reduce outstanding liabilities to 20% of GDP as recommended by the 2018 committee.

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Household Debt

The total debt of households as a percentage of GDP, standing at 42.9% as of June 2024.

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CET1 Ratio

The Common Equity Tier 1 ratio, a measure of a bank's capital health, at 14.0%, above the 8% requirement.

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Net Interest Margins (NIM)

A measure of banks' profitability through the difference between interest earned and interest paid.

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Returns on Equity (RoE)

A measure of financial performance calculated by dividing net income by shareholder equity; at 14.1% as of September 2024.

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Sovereign Green Bonds (SGrBs)

Bonds issued to fund projects with environmental benefits, available to FPIs.

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Foreign Portfolio Investors (FPIs)

Non-resident investors who invest in Indian financial markets.

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RBI's directive on gold loans

RBI's instruction to review and comply with loan guidelines against gold.

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Central Counterparties (CCPs)

Institutions that facilitate clearing and settlement of trades, ensuring transaction security.

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Minimum Public Shareholding (MPS) norms

Regulations ensuring a minimum portion of a company's shares is held by the public.

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Finfluencers

Individuals providing investment advice without SEBI authorization.

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AT-1 Bonds

Perpetual bonds valued at the lowest of specific call dates or a 100-year maturity date.

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SEBI's advertisement code

Guidelines for how SEBI-registered entities can promote financial products.

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Disclosure requirements for FPIs

Mandated clarity on ownership and control for FPIs exceeding certain thresholds.

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Engagement with foreign regulators

RBI's efforts to address compliance and recognition issues with global financial authorities.

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Artificial Intelligence (AI)

AI uses algorithms to perform tasks that typically require human intelligence.

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Non-Banking Financial Companies (NBFCs)

NBFCs provide financial services without accepting deposits from the public.

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Loan Growth Rate

The change in the total amount of loans issued by a financial institution over time.

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Capital to Risk-Weighted Assets Ratio (CRAR)

CRAR measures a bank's available capital as a percentage of risk-weighted assets.

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Return on Assets (ROA)

ROA indicates how profitable a company is concerning its total assets.

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Gross Non-Performing Assets (GNPA)

GNPAs reflect loans that are in default or close to being in default.

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Microfinance

Microfinance provides small loans to individuals or small businesses lacking access to traditional banking.

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Systematic Investment Plan (SIP)

SIP allows investors to invest a fixed amount regularly in mutual funds.

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Assets Under Management (AUM)

AUM refers to the total market value of assets that an investment company manages on behalf of investors.

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Study Notes

Financial Stability Report (FSR), December 2024

  • The report is a half-yearly publication, collating assessments from financial sector regulators.
  • It evaluates current and emerging risks to India's financial system.
  • It comprises three chapters and a Systemic Risk Survey (SRS).
  • Chapter 1: Macro-Financial Risks examines global and domestic financial system resilience.
  • Chapter 2: Financial Institutions: Soundness and Resilience delves into the performance of scheduled commercial banks (SCBs).
  • Chapter 3: Regulatory Initiatives details regulatory actions to address vulnerabilities.
  • Global economy and financial system remain resilient but vulnerabilities persist.
  • Indian economy and financial system are robust.
  • Scheduled commercial banks (SCBs) exhibit strong profitability and healthy balance sheets.
  • Non-performing assets (NPAs) and gross non-performing asset (GNPA) ratios are at multi-year lows.
  • Macro stress tests validate SCBs' resilience under adverse conditions.
  • Non-banking financial companies (NBFCs) remain healthy, with robust asset quality.
  • Insurance sector shows strong solvency ratios.
  • Global public debt is projected to exceed $100 trillion (93% of global GDP).
  • Global financial markets remain tense and volatile.
  • Projected global growth is expected to be around 3-4%.
  • High and rising public debt, coupled with global challenges and emerging technologies, poses medium-term risks to financial stability.
  • India's household debt is at 42.9% of GDP.
  • India's financial system has shown resilience despite global challenges.
  • Financial stability is underpinned by strong macroeconomic fundamentals and robust capital buffers.

Chapter I: Macrofinancial Risks

  • Declining inflation has allowed easing monetary policies globally.
  • Rising global public debt poses a threat to financial stability.
  • High equity valuations and low credit spreads may jeopardize financial stability.
  • Financial conditions remain accommodative but vulnerabilities persist, including leveraged positions, overvalued assets, and hidden risks in non-bank intermediaries.
  • Concerns about global banking asset quality, like credit cards and commercial real estate, persist.
  • Rising global risks like high public debt, demographic shifts, and climate concerns remain a threat.

Chapter II: Financial Institutions: Soundness and Resilience

  • Bank deposits continue to grow in double digits, shifting towards higher-return schemes.
  • Asset quality of Scheduled Commercial Banks (SCBs) improves with decreasing NPA and GNPA ratios.
  • The provisioning coverage ratio (PCR) of SCBs also shows improvement.
  • Robust capital buffers and profitability remain strengths of the banking system.
  • The resilience of the domestic banking system is noted.

Chapter III: Regulatory Initiatives

  • The RBI has issued revised directions on Fraud Risk Management for regulated entities.
  • The PCA framework intends to support early interventions for co-operative banks.
  • Reforms of the SME framework and treatment of defaulters are highlighted.
  • The RBI formed a committee on responsible and ethical Al implementation in the financial sector.
  • SEBI directed market infrastructure institutions and intermediaries to ensure data security.

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Financial Stability Report (FSR) December 2024 PDF

Description

Explore the Financial Stability Report (FSR) published in December 2024, which evaluates risks to India's financial system. This quiz covers key assessments from the three chapters: Macro-Financial Risks, Financial Institutions' Soundness, and Regulatory Initiatives, detailing the resilience and performance of scheduled commercial banks. Test your knowledge on the current state and vulnerabilities within the financial sector!

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