6 July_FSR Detailed Coverage_Finance 360.pdf

RBI releases the Financial Stability Report, June 2024  Global Economy The global economy is facing heightened risks from prolonged geopolitical tensions, elevated public debt, and the slow progress in the last mile of disinflation. Despite these...

RBI releases the Financial Stability Report, June 2024  Global Economy The global economy is facing heightened risks from prolonged geopolitical tensions, elevated public debt, and the slow progress in the last mile of disinflation. Despite these challenges, the global financial system has remained resilient, and financial conditions stable. The goal of bringing inflation down to targets remains the key focus of monetary policy authorities the world over, although headwinds are being encountered from sticky services inflation, elections across half the world’s population, and the recent firming up of commodity prices, besides persisting geopolitical tensions.  Global Economy – Debt Scenario The frenetic expansion of global public debt in recent years has accentuated concerns about its sustainability. These worries are exacerbated by elevated interest rates. Global public debt has increased to 93.2% of GDP by end-2023 - nine percentage points above its pre-pandemic level – bloated by pandemic-era expansionary fiscal policies, post- pandemic supportive measures such as tax breaks and subsidies. Worryingly, the two largest economies in the world, viz., the U.S. and China, are leading the increase in global debt Alongside mounting public debt, private debt also remains elevated. At US$ 251.4 trillion, global debt stood at 239.9% of GDP, with public debt at US$ 97.7 trillion and private debt at US$ 153.7 trillion as at end-2023  Global Economy – Debt Scenario The frenetic expansion of global public debt in recent years has accentuated concerns about its sustainability. These worries are exacerbated by elevated interest rates. Global public debt has increased to 93.2% of GDP by end-2023 - nine percentage points above its pre-pandemic level – bloated by pandemic-era expansionary fiscal policies, post- pandemic supportive measures such as tax breaks and subsidies. Worryingly, the two largest economies in the world, viz., the U.S. and China, are leading the increase in global debt Alongside mounting public debt, private debt also remains elevated. At US$ 251.4 trillion, global debt stood at 239.9% of GDP, with public debt at US$ 97.7 trillion and private debt at US$ 153.7 trillion as at end-2023 The threat of a looming debt crisis cannot be overemphasized. Fiscal consolidation took a backseat in 2023 as global fiscal deficit increased to 5.5% of GDP on an average – a rise of 1.6 percentage points from the previous year. Primary deficit lower by 2 percentage points of GDP on an average in advanced and emerging market economies. The sharp rise in global public debt, especially among the two largest economies, poses significant spillover risks to EMEs, where low income and lowrated countries are particularly vulnerable.  Domestic Economy In the uncertain international economic and financial environment, the Indian economy is exhibiting resilience and remains the fastest growing major economy. India’s contribution to global growth is rising and currently stands at 18.5% in 2023-24 Real GDP rose by 8.2% in 2023-24, up from 7.0% in the previous year, despite muted private and government final consumption and external demand conditions acting as a drag. The Monetary Policy Committee (MPC) has projected real GDP to grow by 7.2% during 2024- 25.  Domestic Economy – Inflation CPI Inflation eased to 4.7% in May 2024 from 5.7% in December 2023 but its near term trajectory remains vulnerable to volatile food prices. Food inflation edged up to 7.9% in May 2024 from 7.6% in January 2024. Core inflation (i.e., CPI excluding food and fuel) is witnessing a sustained decline - it eased to 3.0% in May 2024, its lowest level in the current CPI series  Domestic Economy – External Sector The resilience of the external sector has supported India’s overall macroeconomic stability. India’s current account deficit moderated to US$ 23.2 billion (0.7% of GDP) during 2023-24 from US$ 67.0 billion (2.0% of GDP) during the previous year on the back of a lower merchandise trade deficit. The moderation in trade deficit alongside sustained buoyancy in services exports and remittances have led to current account surplus of 0.6% of GDP at current market prices in Q4:2023-24  Domestic Economy – External Sector During 2023-24, net inflows of foreign portfolio investments (FPI) to India, both debt and equity, recorded a sharp turnaround, reaching its second-highest level ever at US$ 44.6 billion (BoP basis). External vulnerability indicators continue to show improvement: External debt moderated to 18.7% of GDP in March 2024; and the share of short-term debt (with original maturity of up to one year) in total external debt declined to 18.5% in March 2024.  Domestic Economy – Government Finance Fiscal consolidation, buoyant tax collections and improvement in the quality of spending have been the distinguishing features of the Union Government’s fiscal position. As per the provisional accounts (PA), the gross fiscal deficit (GFD) was 5.6% of GDP in 2023-24 as against the budget estimates (BE) of 5.9%.  Domestic Economy – Government Finance As per the provisional accounts (PA) of 2023-24, On the expenditure side, the strategy remained geared towards growth inducing capital expenditure; growth in revenue expenditure remained muted at 1.2%; growth in capital expenditure was at 28.2%. Gross tax collections posted double digit growth, driven up by direct tax collections The central government’s debt is projected to fall to 57.1% of GDP in 2024- 25 (BE) from 58.4% of GDP a year ago, further consolidating public finances Domestic Economy – Government Finance Alongside, states’ debt-to-GDP ratio declined to 27.6% by March 2024 from the pandemic high of 31.0% of GDP in March 2021.  Domestic Economy - Financial Segment Bolstered by increasing participation of households, the assets under management (AUM) of the mutual fund (MF) industry grew by 35.5% during 2023-24 Analysis of cyber incidents reported by regulated entities (REs) to the Reserve Bank shows that 69% of incidents were reported by SCBs, 19% by UCBs and 12% by NBFCs. UCBs had the highest share of incidents (41%) in higher risk categories amongst all REs Among the types of cyber incidents reported, social engineering incidents constituted the largest share. Incidents relating to data leakage, application security and ransomware attacks are rapidly rising.  Scheduled Commercial Banks The asset quality of SCBs recorded sustained improvement and their GNPA ratio moderated to a 12-year low in March 2024. Their NNPA ratio too improved to a record low 0.6.  Scheduled Commercial Banks Net interest income (NII) of SCBs increased during 2023-24 with a surge in trading income augmenting other operating income (OOI). As the need for additional provisions fell due to depleting stock of NPAs, profit after tax (PAT) rose by 32.5% (y- o-y) in March 2024 in spite of a large increase in operating expenses. The return on assets (RoA) and return on equity (RoE) remained strong at 1.3% and 13.8%, respectively, in March 2024 The growing gap between credit and deposit growth is reflected in a rising credit-deposit (C-D) ratio, which has been on the ascent since September 2021 to peak at 78.8% in December 2023 before moderating to 76.8% at end-March 2024. The GNPA ratio of all SCBs may improve to 2.5% by March 2025 under the baseline scenario. As at end March 2024, only one of the top 100 borrower accounts was classified under the NPA category. Scheduled Commercial Banks 13.9% In March 2024 In March 2024 (Y-o-Y) Under the baseline scenario, the aggregate CRAR of 46 major banks is projected to slip from 16.7% in March 2024 to 16.1% by March 2025. It may go down to 14.4% in the medium stress scenario and to 13.0% under the severe stress scenario by March 2025, which is still above the minimum capital requirement. The CET1 capital ratio of the select 46 SCBs may decline from 13.8% in March 2024 to 13.4% a year ahead under the baseline scenario. Primary Urban Cooperative Banks The capital position of UCBs has been continuously improving in the post-pandemic period, with their CRAR increasing to 17.5% in March 2024. Primary Urban Cooperative Banks Both RoA and RoE ratios increased during 2023-24 RoA – 0.8% (March 2024) RoE – 7.9% (March 2024)  Non-Banking Financial Companies The GNPA ratio of NBFCs (including those under resolution) continued its downward trajectory in the post-pandemic period to reach 4.0% in March 2024. The capital position of NBFCs remains healthy: their CRAR stood at 26.6% in March 2024, well above the regulatory minimum requirement. RoA in March 2024 – 3.3% Insurance Sector  Insurance Sector Network analysis indicates that the total outstanding bilateral exposures between financial institutions are expanding, with SCBs holding the largest share. A simulated contagion analysis shows that losses due to failure of five banks with the maximum capacity to cause contagion would not lead to failure of any additional bank.  Domestic Regulatory Initiatives Introduction of Beta Voluntary transition of Reserve Bank of India Margining for Non- version of T+0 rolling Small Finance Banks to (Government Securities Centrally Cleared OTC settlement cycle on Universal Banks Lending) Directions Derivatives optional basis Omnibus Framework for Investments in Alternative Credit/Investment recognising SelfRegulatory Framework for dealing Investment Funds (AIFs) Concentration Norms – Organisations (SROs) for with D-SIBs Credit Risk Transfer REs With the current deposit insurance limit of ₹5 lakh, 97.8% of the total number of deposit accounts (289.8 crore) are fully insured. Of the total assessable deposits of ₹218.23 lakh crore, 43.1% were insured as on March 31, 2024. In terms of global risks, global growth, funding risk, banking turmoil and risk emanating from monetary tightening in advanced economies were perceived to have moderated, whereas the perception on commodity price risk has remained at an elevated level Q. Recently (September 2021) NARCL was launched by the Union Cabinet approving the government guarantee on security receipts to buy bad loans of lenders. It has been incorporated under the Companies Act and has applied for license from RBI. What does R stand for in NARCL? 1. Resolution 2. Reconstruction 3. Restructuring 4. Revenue 5. None of the Above