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Outstanding bilateral exposures among financial system constituents stable: FSR

FSR: Outstanding bilateral exposures among financial system constituents stable

The Reserve Bank has released the 26th issue of the Financial Stability Report (FSR), which reflects the collective assessment of the sub-committee of the Financial Stability and Development Council (FSDC) on risks to the financial stability and resilience of the financial system. The key points of the report are as follows:

  • The global economy is facing formidable headwinds with recessionary risks looming large.

  • The Indian economy is confronting strong global headwinds. Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability.

  • Buoyant demand for bank credit and early signs of a revival in the investment cycle are benefiting from improved asset quality, return to profitability and strong capital and liquidity buffers of scheduled commercial banks (SCBs).

  • The gross non-performing asset (GNPA) ratio of SCBs fell to a 7-year low of 5 per cent and net non-performing assets (NNPA) dropped to a ten-year low of 1.3 per cent in September 2022.

  • Macro stress tests for credit risk reveal that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios. The system-level capital to risk weighted assets ratio (CRAR) in September 2023, under baseline, medium and severe stress scenarios, is projected at 14.9 per cent, 14.0 per cent and 13.1 per cent, respectively.

  • Stress tests for open-ended debt mutual funds showed no breach in limits pertaining to interest rate, credit and liquidity risks. Consolidated solvency ratio of life, non-life insurance companies remained above the prescribed minimum level.

  • The CRAR of urban co-operative banks (UCBs) rose to 16.1 per cent in September 2022 while that of NBFCs stood at 27.4 per cent. The consolidated solvency ratio of the insurance sector remains above the minimum threshold limit of 150 per cent.

  • A contagion analysis of the banking network based on the end-September 2022 position indicates that if the bank with the maximum capacity to cause contagion losses fails, it will cause a solvency loss of 2.49 per cent (as compared with 2.83 per cent in March 2022) of total Tier 1 capital of SCBs and a liquidity loss of 0.31 per cent (0.02 per cent in March 2022) of total HQLA of the banking system.

  • Network analysis indicates that the total outstanding bilateral exposures among constituents of the financial system are stable. SCBs continued to have the largest bilateral exposures in the Indian financial system, which reached pre-pandemic levels in September 2022. A simulated contagion analysis shows that losses due to the failure of five banks with the maximum capacity to cause contagion would not lead to the failure of any additional bank.

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