RBI report flags elevated pressures in NBFC sector

In its latest Financial Stability Report released on Thursday, the Reserve Bank of India (RBI) conducted a thorough examination of the nation’s economic health, highlighting key areas of strength and potential challenges. The report delves into macro stress tests for credit risks, emphasizing the robustness of the banking sector while expressing concerns about stress in the Non-Banking Financial Company (NBFC) sector, especially under high-risk stress scenarios.

The report commences by asserting that macro stress tests for credit risks indicate the ability of all banks to comply with minimum capital requirements, even under severe stress scenarios. This positive outlook is reassuring, suggesting that scheduled commercial banks (SCBs) are well-capitalized and capable of withstanding macroeconomic shocks.

However, the report also highlights a nuanced concern regarding the NBFC sector. It cautions that stress in the NBFC sector, especially under high-risk stress scenarios, could be higher relative to the position in March 2023. The RBI emphasizes the need for monitoring contagion risks due to increased inter-bank exposure in the NBFC sector.

NBFC shows improved resilience

Despite these concerns, the report underscores the improved resilience of the NBFC sector, citing a Capital to Risk-Weighted Assets Ratio (CRAR) of 27.6%, a gross non-performing asset (GNPA) ratio of 4.6%, and a return on assets of 2.9% as of September. The data indicates a positive trajectory for the NBFC sector, albeit with a cautious stance warranted for the evolving outlook and associated risks.

The RBI expects the aggregate CRAR of 46 major banks to decline from 16.6% in September to 14.8% by September 2024. Despite this anticipated dip, the central bank does not foresee any SCB breaching the minimum capital requirement of 9% in the next year. The CRAR and Common Equity Tier-1 (CET-1) ratio of SCBs stood at 16.8% and 13.7%, respectively, as of September 2023.

These figures portray a robust capitalization position among SCBs, highlighting their ability to absorb macroeconomic shocks. The RBI’s assertion that SCBs are well-capitalized provides a foundation for confidence in the banking sector’s resilience amid evolving economic conditions.

The report sheds light on positive trends in the asset quality of banks. Both net Non-Performing Assets (NPA) and gross NPA registered multi-year lows, standing at 0.8% and 3.2%, respectively, at the end of September. This decline indicates a healthier asset quality environment, contributing to the overall improvement in the Indian financial system’s health.

The RBI acknowledges the steady improvement in the Indian financial system’s health, citing moderating retail inflation and emerging optimism regarding the global economy’s soft landing. The report notes that while global interest rates have peaked in the current monetary policy tightening cycle, macroeconomic conditions remain uncertain.

In light of these considerations, the RBI adopts a prudent approach, emphasizing the importance of proceeding with caution on the evolving outlook and associated risks. The report underscores the challenges faced by the global economy, including the prospects of slowing growth, large public debt, increasing economic fragmentation, and prolonged geopolitical conflicts.

The RBI’s report identifies two major focus areas for policymakers: cyber risk and climate-related risk. In the era of rapid technological advancements, the risks of cyberattacks, data breaches, and operational failures have increased. The RBI emphasizes its commitment to preserving financial stability without compromising the availability of funds for the productive requirements of the economy.