Financial Stability Report (FSR) December 2024 PDF

Financial Stability Report (FSR), December 2024 1|P a g e  30th Financial Stability Report (FSR), December 2024 Released by- Reserve Bank of India (RBI) - Financial Stability Department About the report- FSR is a half-yearly publication, with contributions from all...

Financial Stability Report (FSR), December 2024 1|P a g e  30th Financial Stability Report (FSR), December 2024 Released by- Reserve Bank of India (RBI) - Financial Stability Department About the report- FSR is a half-yearly publication, with contributions from all financial sector regulators. It presents the collective assessment of the Sub Committee of the Financial Stability and Development Council (FSDC) on current and emerging risks to the stability of the Indian financial system. FSR consists of 3 Chapters and a Systemic Risk Survey (SRS). The three chapters are – o Chapter I: Macro-Financial Risks o Chapter II: Financial Institutions: Soundness and Resilience o Chapter III: Regulatory Initiatives in the Financial Sector Highlights: The global economy and the financial system remain resilient. While near-term risks have receded, vulnerabilities such as stretched asset valuations, high public debt, prolonged geopolitical conflicts and risks from emerging technologies pose medium term risks to financial stability. The Indian economy and the domestic financial system are underpinned by strong macroeconomic fundamentals, healthy balance sheets of banks and non-banks. The soundness of scheduled commercial banks (SCBs) has been bolstered by strong profitability, declining non-performing assets and adequate capital and liquidity buffers. Return on assets (RoA) and return on equity (RoE) are at decadal highs while the gross non- performing asset (GNPA) ratio has fallen to a multi-year low. Macro stress tests demonstrate that most SCBs have adequate capital buffers relative to the regulatory minimum even under adverse stress scenarios. Stress tests also validate the resilience of mutual funds and clearing corporations. Non-banking financial companies (NBFCs) remain healthy with sizable capital buffers, robust interest margins and earnings and improving asset quality. The consolidated solvency ratio of the insurance sector also remains above the minimum threshold limit. Note: Financial Stability and Development Council (FSDC) It has been constituted vide GOI notification dated 30th December 2010. The Council is chaired by the Union Finance Minister and its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority. Sub-Committee of the Financial Stability and Development Council (FSDC) – The FSDC Sub-committee has been set up under the chairmanship of Governor, RBI. All the members of the FSDC are also the members of the Sub-committee. Additionally, all four Deputy Governors of the RBI and Additional Secretary, DEA, in charge of FSDC, are also members of the Sub Committee. 2|P a g e  Chapter I: Macrofinancial Risks Global Economy: Since the June 2024 FSR, declining inflation has allowed most countries to shift towards easing monetary policy, with only a few exceptions. o Despite escalating geopolitical conflicts, global economic activity and trade have shown resilience. Global financial markets remain tense and vulnerable to sudden volatility due to high policy uncertainty, including political spillovers. Projected global growth: AEs - Advanced Economies, EMDEs - Emerging Market and Developing Economies Chart: Global Growth Forecast Financial conditions remain accommodative, but vulnerabilities persist, including leveraged positions, overvalued assets, high public and private debt, and hidden risks in less-regulated non-bank financial intermediaries. Concerns about global banking asset quality also continue, especially in areas like credit cards and commercial real estate. Global Macrofinancial Risks: High and Rising Levels of Public Debt: o Global public debt is projected to exceed $100 trillion (93% of global GDP) by the end of 2024, driven mainly by the U.S. and China. ▪ This debt is expected to surpass 100% of global GDP by 2030. o High debt levels, interest burdens, and debt-at-risk raise concerns about financial stability amid challenges like ageing populations, climate adaptation, green transitions, and rising defence spending due to geopolitical tensions. o Rising bank exposure to governments in emerging markets and developing economies (EMDEs) has strengthened the sovereign-bank nexus, increasing the risk of shocks spreading and exposing banks to capital and funding risks from higher sovereign bond yields. Asset Valuations and Volatility: o Corporate bond valuations are high, and sovereign bond yields have risen due to policy and geopolitical concerns despite monetary easing. 3|P a g e  o High equity valuations and low credit spreads may threaten financial stability if market expectations become volatile. o The widespread use of crypto-assets and stablecoins can weaken monetary policy, increase fiscal risks, bypass capital flow controls, and divert resources from the real economy, threatening global financial stability. o Tokenization can increase links between traditional finance and decentralized finance (DeFi), including the crypto-assets ecosystem, potentially causing spillovers to the broader financial system. Impact of Artificial Intelligence: o AI in finance faces challenges like bias, misuse, faulty predictions, data quality issues, overreliance on common models, and third-party dependence, with significant model risks arising from the "black box" problem - the difficulty in understanding how complex models make decisions. o Risks to financial stability: ▪ Interconnectedness and Concentration: Overreliance on shared AI technology and service providers increases market concentration and systemic risks. ▪ Cybersecurity Threats: AI enables advanced cyberattacks, like deepfakes, raising concerns about cyber risks affecting financial stability. ▪ Market Volatility: AI-driven trading strategies can amplify market stress through correlated actions, leverage, and feedback loops. ▪ Systemic Opacity: Increased AI use in non-banking financial institutions (NBFIs) reduces transparency, heightening systemic risks. India Specific: Domestic Growth and Inflation: Amid global economic and financial uncertainties, the India remains the fastest growing major economy of the world. o Real GDP is expected to grow by 6.6% in 2024-25, driven by revived rural consumption, increased government spending and investment, and robust services exports. o India's strong growth momentum is backed by focused monetary policy, a stable financial system, robust bank balance sheets, and steady credit expansion supporting businesses and households. Consumer Price Index (CPI) inflation eased to 5.5% in November 2024 due to lower food prices and a favourable base effect, while core CPI inflation (excluding food and fuel) rose to 3.7%, increasing by 64 basis points since May 2024. o A bumper kharif harvest and rabi prospects may ease foodgrain prices, but extreme weather, geopolitical conflicts, and geo-economic fragmentation pose risks to food inflation and global commodity prices. External Sector: The trade deficit widened to $202.4 billion during April-November 2024, up from $171.0 billion a year ago. o Merchandise exports grew by 2.2% year-on-year, while imports rose by 8.3%, driven by demand for gold, petroleum, crude and products, and electronic goods. Strong services exports and remittances partly offset the widening merchandise trade deficit, resulting in a current account deficit of 1.2% of GDP in the first half of 2024-25. 4|P a g e  Net Foreign Direct Investment (FDI) inflows declined year-on-year, while strong Foreign Portfolio Investment (FPI) inflows in the first half of 2024-25 were later offset by significant outflows. Capital flows exceeded the current account deficit, boosting foreign exchange reserves, which stood at $644.4 billion as of December 20, 2024, the fourth largest globally. o Foreign exchange reserves covered 99% of external debt or nearly a year of merchandise imports as of end-September 2024. Government Finance: According to provisional accounts for 2023-24, the central government's gross fiscal deficit (GFD) was 5.6% of GDP, below the budget estimate of 5.9%. o The central government's fiscal position improved mainly due to broad-based growth in revenue receipts. Revenue expenditure is expected to rise modestly by 6.2%, bringing the revenue expenditure to capital outlay ratio to an all-time low of 4.0 in 2024-25. Table: Central Government Finances - Key Deficit Indicators The central government debt-to-GDP ratio, which peaked at 62.7% in 2020-21 due to COVID-19 measures, has been declining and is estimated at 56.8% in 2024-25. o The interest payment to revenue receipts ratio is expected to decrease to 37.2% in 2024-25, down from 39.1% in 2023-24 (Revised Estimates). State Governments – Key Indicators: o The states' consolidated fiscal deficit (GFD) was 2.9% of GDP in 2023-24 (Provisional Actuals), staying within the Centre's prescribed limit of 3.5%. o States expect their revenue deficit to stay at 0.2% of GDP, while their consolidated fiscal deficit is projected to slightly increase to 3.2% in 2024-25 (Budget Estimates). o Outstanding liabilities, which peaked at 31.0% of GDP in March 2021, have declined with fiscal consolidation and are projected to be 28.8% of GDP by March 2025. ▪ The medium-term goal is to reduce it to the 20% threshold recommended by the Fiscal Responsibility and Budget Management (FRBM) Review Committee (2018). Table: State Governments - Key Deficit Indicators 5|P a g e  India's general government debt and fiscal deficit are higher than those of other emerging market and developing economies (EMDEs). o With ongoing fiscal consolidation, they are expected to decrease over the medium term and align with the emerging market and developing economies (EMDE) average. Household Finance: India's household debt stood at 42.9% of GDP (at current market prices) as of June 2024. While this is relatively low compared to other emerging market economies (EMEs), it has been rising over the past three years. o Household debt is rising due to more borrowers, not higher average debt, with individuals accounting for 91% of household financial liabilities as of March 2024. Banking System: The resilience of the domestic banking system has strengthened due to robust capital buffers, strong earnings, and improved asset quality. o The Common Equity Tier 1 (CET1) ratio, the highest quality of regulatory capital, stood at 14.0%, exceeding the regulatory requirement of 8% (including the capital conservation buffer). o Banks maintained strong net interest margins (NIM) and profitability, with returns on assets (RoA) at 1.4% and returns on equity (RoE) at 14.1% as of September 2024. Driven by lower slippages, higher write-offs, and steady credit demand, the gross non- performing assets (GNPA) ratio of scheduled commercial banks (SCBs) dropped to a multi- year low of 2.6%, while the net non-performing assets (NNPA) ratio fell to 0.6% due to strong provisioning. The market dimension of the Banking Stability Indicator (BSI) improved due to a decrease in risk-weighted assets (RWAs) for market risk. o However, a decline in the liquidity coverage ratio (LCR) and liquid asset ratio weakened the liquidity aspect, though banks still maintain sufficient liquidity buffers above the regulatory minimum. Banking Sector Soundness Indicators: 6|P a g e  Key Terms: CRAR (Capital to Risk Weighted Assets Ratio): Capital to risk weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk. The higher the CRAR of a bank the better capitalized it is. Non-Performing Assets (NPA): An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. LCR - Liquidity Coverage Ratio: It is designed to ensure that banks hold a sufficient reserve of high-quality liquid assets (HQLA) to allow them to survive a period of significant liquidity stress lasting 30 calendar days. PCR - Provisioning Coverage Ratio: Percentage of funds that a bank sets aside for losses due to bad debts/NPAs. Slippages denote the fresh bad loans/NPAs in a year. Common Equity Tier 1 (CET1) or Tier-1 Capital refers to the core capital held in a bank's reserves and is used to fund business activities for the bank's clients. A key concern is the sharp increase in write-offs, especially among private sector banks, potentially hiding deteriorating asset quality and weaker underwriting standards. Financial Markets: Since June 2024, financial conditions have improved due to better system liquidity and a shift to a neutral monetary policy stance. The Indian equity market, despite corrections due to slower corporate earnings growth and valuation concerns, outperformed emerging market peers in 2024. o India's weightage in the MSCI Emerging Markets Index increased from 9.2% in March 2019 to 19.9% in November 2024. Risks Related to Emerging Technologies: * Artificial intelligence/ machine learning - AI/ML Non-Banking Financial Companies (NBFCs): Increased risk weights on certain NBFC and bank loans slowed overall NBFC loan growth to 6.5% (h-o-h) by September 2024, particularly affecting upper-layer NBFCs with high retail exposure, while middle-layer NBFCs maintained strong growth in retail lending. The Non-Banking Financial Company (NBFC) sector remains healthy with strong capital buffers, with the Capital to Risk-Weighted Assets Ratio (CRAR) at 26.1% as of September 2024. It has robust interest margins and earnings (Net Interest Margin at 5.1% and Return on Assets at 2.9%) and improving asset quality (Gross Non-Performing Assets at 3.4%). Write-offs are increasing, with some outlier NBFCs reporting significantly higher levels. 7|P a g e  Microfinance: Credit to the microfinance sector by banks (including Small Finance Banks), NBFC- Microfinance Institutions (NBFC-MFIs), and other Non-Banking Financial Companies (NBFCs) has slowed in the current financial year after rapid growth over the last three years. The microfinance sector is facing stress with more loan defaults across all lenders and loan amounts. o Borrower debt levels have increased alongside rising loan defaults. Mutual Funds: The mutual fund (MF) sector saw strong growth in 2024-25 (up to November 2024), with assets under management (AUM) reaching a record ₹68.1 lakh crore, driven primarily by equity schemes, particularly sectoral and thematic schemes. Systematic Investment Plans (SIPs) have been a major contributor to the growth of MF AUM, promoting financialization of household savings through regular small investments, even during periods of market volatility. o Both outstanding SIP accounts and gross SIP contributions reached all-time highs, with contributions surpassing ₹25,000 crore in October 2024. 8|P a g e  Chapter II: Financial Institutions: Soundness and Resilience This chapter presents stylised facts and analysis relating to recent developments in the domestic financial sector. It outlines the performance of scheduled commercial banks (SCBs) in India through various parameters, viz. business mix; asset quality; concentration of large borrowers; capital adequacy; earnings and profitability. Scheduled Commercial Banks (SCBs): Amid India's recent monetary policy tightening, bank deposits continue to grow in double digits, with a shift towards higher-return schemes. Term deposit growth has slowed for both public and private sector banks but still exceeds current and savings account (CASA) deposit growth. Chart: Deposit and Credit Profile of SCBs Asset Quality: The asset quality of SCBs improved, with the Gross Non-Performing Assets (GNPA) ratio dropping to a 12-year low of 2.6% in September 2024, while the Net Non-Performing Assets (NNPA) ratio remained at 0.6%. o The write-off to Gross Non-Performing Assets (GNPA) ratio increased for Foreign Banks (FBs) in September 2024, while it slightly declined for Public Sector Banks (PSBs) and Private Sector Banks (PVBs). o The breakdown of NPA movements shows that write-offs are a major factor in reducing NPAs. The Provisioning Coverage Ratio (PCR) of Scheduled Commercial Banks (SCBs) increased to 77.0% in September 2024, driven mainly by proactive provisioning by Public Sector Banks (PSBs). 9|P a g e  Chart: Select Asset Quality Indicators *NNPA ratio is the proportion of net non-performing assets in net loans and advances. *PCR is the proportion of provisions (without write-offs) held for NPAs to GNPA. Credit Quality of Large Borrowers (fund-based and non-fund-based exposure of ₹5 crore and above): The share of large borrowers in the GNPA of SCBs has decreased faster than their share in overall credit over the past two years. Chart: Select Asset Quality Indicators of Large Borrowers Capital Adequacy: The Capital to Risk-Weighted Assets Ratio (CRAR) and Common Equity Tier 1 (CET1) ratio of SCBs were 16.7% and 14.0%, respectively, in September 2024, well above the regulatory minimum. 10 | P a g e  Chart: Capital Adequacy Earnings and Profitability: The profitability of SCBs improved in H1:2024-25, with profit after tax (PAT) rising by 22.2% year-on-year. Net Interest Margin (NIM) has slightly decreased across all bank groups. However, both Return on Equity (RoE) and Return on Assets (RoA) improved in September 2024. Chart: Select Performance Indicators of SCBs Liquidity: The Liquidity Coverage Ratio (LCR) remained well above the 100% regulatory minimum across all bank groups. o It is highest for Foreign Banks (FBs). 11 | P a g e Resilience - Macro Stress Tests: Macro stress tests are performed to assess the resilience of SCBs’ balance sheets to unforeseen shocks emanating from the macroeconomic environment. The framework for macro stress testing has been revised from this issue of the FSR. Macro stress tests aim to predict the capital ratios of banks under a baseline and two adverse scenarios over the next one-and-a-half years (until March 2026). o These tests consider credit risk, interest rate risk in the banking book, and market risk. o Adverse Scenario 1 assumes ongoing geopolitical risks and increased volatility in global financial markets. o Adverse Scenario 2 assumes a combination of global and specific risk factors leading to a sharp and synchronized slowdown in economic growth in major economies. Chart: Macro Scenario Assumptions Minimum requirement of CRAR: 9% All banks would be able to meet the minimum regulatory CET1 ratio of 5.5%. Projection of SCBs’ GNPA Ratios: 12 | P a g e Primary (Urban) Cooperative Banks: Credit by primary urban cooperative banks (UCBs) grew by 7.4% year-on-year in September 2024. o Both scheduled (SUCBs) and non-scheduled UCBs (NSUCBs) contributed to this growth. The capital position of UCBs remained strong, with their combined CRAR increasing to 17.5% in September 2024. The GNPA (9.6%) and NNPA (3.3%) ratios of UCBs increased in September 2024 compared to March 2024 but remained lower than September 2023 levels. The provisioning coverage ratio (PCR) decreased to 67.5% in September 2024, after improving in March 2024. UCBs’ profitability ratios improved in September 2024 compared to March 2024, despite a general decline in net interest margin (NIM). Non-Banking Financial Companies (NBFCs): NBFCs have been classified into 4 layers since October 1, 2022: Base Layer (6%), Middle Layer (71.2%), Upper Layer (22.8%), and Top Layer. Credit growth of NBFCs slowed to 16.0% in 2024, down from 22.1% a year earlier, due to the high base effect and increased risk weights for consumer lending introduced by the Reserve Bank in November 2023. o The slowdown was more pronounced for NBFCs in the Upper Layer (NBFC-UL), primarily comprising NBFC-Investment and Credit Companies (NBFC-ICCs) with portfolios focused on retail lending. The GNPA ratio of government-owned NBFCs, which account for 55.4% of advances by NBFCs in the Middle Layer (NBFC-ML), improved to 2.0% in September 2024. o For privately-owned NBFCs in the NBFC-ML, the GNPA ratio was 5.3%. 13 | P a g e  The system-level CRAR of NBFCs was strong at 26.1% in September 2024. Upper layer NBFCs were more vulnerable on the liquidity front due to a higher proportion of short-term liabilities compared to their total assets than NBFCs in the middle layer. Insurance Sector: The minimum solvency ratio requirement prescribed by the Insurance Regulatory and Development Authority of India (IRDAI) for Indian insurance companies is 150%. o The solvency ratio of an insurance company assesses its ability to meet obligations towards policyholders by reflecting the level of its assets over and above its liabilities. o The higher the solvency ratio, the better will be the ability of the insurer to meet its liabilities. At an aggregate level, the solvency ratio for life insurance companies has remained above the prescribed threshold for both public and private sectors. The solvency ratio of three public sector non-life insurers was below the prescribed baseline but remained above the threshold for other non-life insurer categories. Contagion Analysis: It uses network technology to estimate the systemic importance of different financial institutions. The failure of a systemically important bank entails solvency and liquidity losses for the banking system which, in turn, depends on the initial capital and liquidity position of banks along with the number, nature (whether it is a lender or a borrower) and magnitude of the interconnections that the failing bank has with the rest of the banking system. 14 | P a g e  Chapter III: Regulatory Initiatives in the Financial Sector Amid global financial uncertainty, regulators are focused on strengthening the financial system and addressing potential vulnerabilities. o Policymakers are prioritizing financial system resilience by addressing technological advancements and climate risks through proactive regulations. o Regulatory initiatives focus on strengthening non-bank financial intermediaries, the banking sector, and cross-border payment systems. Global Regulatory Developments Markets and Financial Stability: o The International Organisation of Securities Commissions (IOSCO) released a report in June 2024 on "Market Outages," proposing measures to enhance market resilience and guide responses to trading suspensions caused by technical issues. o A survey was conducted to assess the needs and arrangements of trading venues and market participants. o The IOSCO report on Leveraged Loans and Collateralised Loan Obligations (CLOs) highlights good practices for investor protection, noting a shift in borrowers from traditional industrial sectors to technology and healthcare, along with a decline in corporate credit profiles. Technology and Financial Stability: o The European Union (EU) enacted the European Artificial Intelligence Act (AI Act) in August 2024, becoming the first to establish comprehensive AI regulations. ▪ The Act ensures AI systems in the EU are reliable, protect fundamental rights, and promote innovation and investment. o Bank for International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) to the G20 highlights that token-based financial arrangements can reshape market structures and create network effects. o The Financial Stability Board (FSB) report on the financial stability highlights vulnerabilities in Distributed Ledger Technology (DLT)-based tokenization, including liquidity mismatches, leverage, asset pricing issues, interconnectedness, and operational fragilities. o The FSB status report on the G20-endorsed Crypto-Asset Policy Implementation Roadmap highlights that stablecoin issuers are emerging as major holders of mainstream financial assets through their collateral holdings. Banking and Financial Stability: o The Basel Committee on Banking Supervision (BCBS) report highlights challenges in managing banks' liquidity risk due to social media, financial digitalization, and ripple effects from non-systemic bank failures. o The FSB report on "Depositor Behaviour and Interest Rate and Liquidity Risks" stresses the need for better resolution preparedness, especially for banks dependent on uninsured deposits. o The BCBS released a consultative document on "Principles for Sound Management of Third-Party Risk," highlighting risks from banks' growing reliance on third-party service providers for technology, cost reduction, and efficiency. ▪ The principles provide a common baseline for managing third-party risks while allowing flexibility for evolving practices and regulations. Non-Banking Financial Intermediation and Financial Stability: 15 | P a g e  o Non-Bank Financial Intermediation (NBFI), comprising nearly half of global financial assets, poses systemic risks. o The FSB aims to enhance its resilience by stabilizing liquidity, improving risk monitoring, and reducing central bank reliance. Cross-Border Payments and Financial Stability: o The G20 introduced the Legal Entity Identifier (LEI) system after the Global Financial Crisis (GFC) to improve transparency and manage financial risk across entities, initially in OTC derivatives and securities markets. o The LEI is now part of the G20 Roadmap to enhance cross-border payment efficiency by supporting KYC processes and sanctions screening. Climate Finance and Financial Stability: o The Network for Greening the Financial System (NGFS) addresses climate-related risks in regulation, investment, and monetary policy through supervisory practices, climate scenarios, and guidance on nature-related financial risks. o NGFS published a framework on "Nature-related Financial Risks" to help central banks and supervisors identify, manage, and disclose such risks. o The NGFS report, "Climate Change, the Macroeconomy, and Monetary Policy," examines how physical climate risks and the net-zero transition affect output and inflation. Initiatives from Regulators / Authorities: Directions on Fraud Risk Management to Regulated Entities: The RBI issued revised directions on Fraud Risk Management for regulated entities (REs) to prevent, detect, and report fraud incidents promptly to law enforcement and supervisors. The directions enhance the Board's role in overseeing and governing fraud risk management in REs. The directions aim to minimize fraud incidents and their impact by equipping institutions with effective preventive and corrective measures. Prompt Corrective Action (PCA) Framework for Primary (Urban) Co-operative Banks (UCBs): The RBI replaced the Supervisory Action Framework (SAF) for Urban Cooperative Banks (UCBs) with the Prompt Corrective Action (PCA) Framework to enable early intervention and timely remedial measures for restoring financial health. Under the PCA framework, UCBs breaching risk thresholds related to capital adequacy, asset quality, or profitability are placed under a corrective action plan. The plan includes restrictions on balance sheet expansion, capital investments, high-risk asset exposure, and operational constraints to restore financial health. The provisions of the PCA framework will be effective from April 1, 2025. o The PCA Framework applies to Tier 2, Tier 3, and Tier 4 UCBs, excluding those under All-Inclusive Directions, while Tier 1 UCBs are subject to enhanced monitoring. Treatment of Wilful Defaulters and Large Defaulters: The RBI issued guidelines on classifying wilful defaulters to enhance borrower accountability and strengthen banks' risk management. 16 | P a g e Cyber Resilience and Digital Payment Security Controls for Non-Bank Payment System Operators: The RBI issued directions on ‘Cyber Resilience and Payment Security Controls’ for non-bank payment system operators to strengthen digital payment security against cyber threats. The directions mandate a Cyber Crisis Management Plan (CCMP) to detect, contain, respond to, and recover from cyber threats and attacks. They specify minimum information security standards for Payment System Operators (PSOs) in areas such as identity and access management, network security, vendor risk management, business continuity planning, and cloud security. Scheme for Trading and Settlement of Sovereign Green Bonds (SGrBs) in the International Financial Services Centre (IFSC) in India: The RBI, in consultation with the government and IFSCA, has notified a scheme to allow eligible foreign investors to invest and trade in Sovereign Green Bonds (SGrBs) at International Financial Services Centres (IFSC). Currently, SEBI-registered Foreign Portfolio Investors (FPIs) can invest in Sovereign Green Bonds (SGrBs), and the scheme aims to further ease access for non-resident investors via IFSC, enhancing global climate capital flows into India. Irregular Practices in Gold Loans: The RBI has directed supervised entities (SEs) to review policies, address gaps, and take corrective actions to ensure compliance with guidelines for loans against gold ornaments and jewellery. Recognition of Central Counterparties by Foreign Regulators: The RBI is engaging with foreign regulators, including European Securities and Markets Authority (ESMA), to address concerns over extraterritorial regulations and derecognition of Indian central counterparties (CCPs), which impact liquidity and financial stability. Strengthening of Foreign Portfolio Investors Norms: The SEBI has mandated detailed disclosure of ownership, economic interest, or control for Foreign Portfolio Investors (FPIs) that either: o (a) hold over 50% of their Indian equity Assets Under Management (AUM) in a single corporate group, or o (b) hold more than ₹25,000 crore of equity AUM in the Indian market, to prevent circumvention of Minimum Public Shareholding (MPS) norms. Association of Persons Regulated by the SEBI and their Agents with Certain Persons (‘Finfluencers’): SEBI has amended regulations to prohibit SEBI-regulated entities (e.g., stock exchanges, clearing corporations, and depositories) and their agents from associating with persons providing investment advice or recommendations unless registered or permitted by SEBI. These entities and agents are also barred from associating with persons making claims about returns or performance related to securities unless authorized by SEBI. SEBI-regulated entities and their agents must avoid prohibited activities without authorization, while SEBI-registered entities acting as ‘finfluencers’ must comply with SEBI’s advertisement code. 17 | P a g e Valuation of Additional Tier 1 Bonds (‘AT-1 Bonds’): As per SEBI’s framework, perpetual bonds held by mutual funds are valued at the lowest of the values obtained by considering multiple call dates or a deemed maturity of 100 years from issuance. Mutual funds are permitted to value Additional Tier-1 (AT-1) bonds on a Yield-to-Call basis, while the deemed maturity for all other perpetual bonds follows the SEBI Master Circular. Measures to Strengthen Equity Index Derivatives Framework: The minimum contract size for index derivatives has been increased from ₹5 lakh to ₹15 lakh, with the contract value now set between ₹15 lakh and ₹20 lakh, up from the previous ₹5 lakh to ₹10 lakh range. Review of Eligibility Criteria for Entry/Exit of Stocks in Derivatives Segment: SEBI revised the eligibility criteria for equity derivatives in August 2024 to include only high- quality stocks with sufficient market depth, increasing thresholds for Median Quarter Sigma Order Size (MQSOS), Market Wide Position Limit (MWPL), and Average Daily Delivery Value (ADDV). The thresholds were raised as follows: MQSOS from ₹25 lakh to ₹75 lakh, MWPL from ₹500 crore to ₹1,500 crore, and ADDV from ₹10 crore to ₹35 crore, reflecting significant market growth. Review of Stress Testing Framework for Equity Derivatives Segment: New stress testing methods were introduced to better measure tail risks in the equity derivatives segment and determine the default fund size for clearing corporations. Review of Small and Medium Enterprises (SME) framework: SEBI amended the SEBI (ICDR) Regulations, 2018, and SEBI (LODR) Regulations, 2015, to strengthen the public issue framework for SMEs, requiring issuers to have an operating profit of ₹1 crore in two of the last three financial years and limiting Offer for Sale (OFS) by shareholders to 20% of the issue size. Key changes include phased release of excess promoter holdings, aligning the allocation method for Non-Institutional Investors (NIIs) in SME IPOs with Main Board IPOs, capping General Corporate Purpose use to 15% of the raised amount or ₹10 crore, and prohibiting issue proceeds for related party loan repayments. Related party transaction norms for SME-listed entities are now aligned with Main Board standards, considering transactions as material if they exceed 10% of annual consolidated turnover or ₹50 crore, whichever is lower. Cybersecurity and Cyber Resilience Framework (CSCRF) for the SEBI Regulated Entities: SEBI introduced the CSCRF to strengthen IT infrastructure and data protection at regulated entities (REs) through graded cybersecurity standards and guidelines. The framework promotes comprehensive risk management by guiding REs to identify, assess, and mitigate cybersecurity risks while enhancing resilience to recover quickly from cyber incidents and minimize disruptions. It emphasizes efficient audits, compliance, continuous improvement, and vigilance in cybersecurity practices, ensuring REs stay updated with evolving cyber threats and technologies. 18 | P a g e Use of Artificial Intelligence in the Financial Sector: The RBI formed a committee in December 2024 to develop a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector, focusing on assessing AI adoption, identifying risks, and recommending mitigation and monitoring measures. SEBI directed market infrastructure institutions and intermediaries using AI tools to ensure data privacy, security, and integrity, taking full responsibility for their usage, regardless of adoption scale. Other Developments Customer Protection: Over 70% of complaints received by RBI Ombudsman offices in Q1 and Q2 of 2024-25 related to loans, advances, and payment modes such as mobile banking, credit cards, and ATMs. Deposit Insurance: The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance coverage to depositors of all banks in India. As of September 30, 2024, 1,989 banks were registered with DICGC, including 139 commercial banks (11 small finance banks, 6 payment banks, 43 regional rural banks, and 2 local area banks) and 1,850 cooperative banks. As of September 30, 2024, with a deposit insurance limit of ₹5 lakh, 97.7% of deposit accounts (293.7 crore) were fully insured, covering 42.6% of the total deposit value (₹227.3 lakh crore). The insured deposits ratio (i.e., the ratio of insured deposits to assessable deposits) was higher for cooperative banks (63.1%), followed by commercial banks (41.5%). o Within commercial banks, PSBs have higher insured deposit ratio vis-à-vis PVBs. 19 | P a g e  Systemic Risk Survey The 27th round of the Reserve Bank’s Systemic Risk Survey (SRS) was conducted in November 2024 to solicit perceptions of experts, including economists and market participants, on major risks faced by the Indian financial system. In addition to key global and macroeconomic factors, the survey assessed: o The impact of global economic uncertainty on India’s macro-financial stability. o The revival of the private capex cycle. Feedback from 51 respondents: o All major risk groups were rated as medium risk category. ▪ Macroeconomic risk perception slightly increased due to concerns over growth, inflation, capital flow volatility, and consumption demand. o Other risk categories showed similar or reduced risk perception compared to the previous survey. Geopolitical conflicts and geo-economic fragmentation are seen as high risks to the domestic financial system. Risk scores for commodity price volatility and monetary tightening in advanced economies have significantly decreased. Among macroeconomic factors, risk perception related to domestic growth, inflation, and capital flows has increased significantly compared to the previous survey. Climate risk, a macroeconomic factor, remains in the high-risk category despite a slight decline in its overall risk score. Financial market risk perception decreased across most categories, except for foreign exchange rate risks. Equity price volatility remains in the high-risk category. Institutional risk perception worsened for asset quality and profitability compared to the previous survey. Cyber risk remains in the high-risk category. Risks to Financial Stability: Geopolitical conflicts Global growth and inflation concerns Capital outflows and impact on Indian Rupee Increase in trade tariffs and impact on global trade Slowdown in domestic growth and consumption demand Climate risks Cybersecurity concerns 20 | P a g e