Bank NPAs, housing sector momentum, crypto risks: Key takeaways from RBI report

The Reserve Bank of India, in its Financial Stability Report of December 2021, released on Wednesday, maintained that the Indian economy has been recovering after the destructive second wave of the Covid-19 pandemic in April-May 2021, and that consumer confidence and business optimism were both growing. But it also noted that banks’ gross non-performing assets, already substantial at 6.9 percent in September 2021 could, in a worst-case scenario, rise to 9.5 percent by September 2022. It added that even if economic stress remained the same as at present, GNPAs could still increase to 8.1 percent in the same period. However, it assured that banks would be able to meet minimum capital requirements even if severe stress conditions arose. Key highlights of the report:* Global recovery has been losing momentum in the second half of 2021 due to the resurfacing of Covid-19 infections, especially the new variant Omicron. Other factors impacting recovery adversely include supply chain disruptions and bottlenecks, rising inflation, and shifts in monetary policy stances and actions by the central banks of both advanced economies and some emerging market economies. * Many emerging market economies are having a tough time, hit by tightening global conditions, rising energy prices and domestic inflation. Capital flows to these markets have reduced while equity flows are volatile. The US dollar has appreciated considerably against many emerging market currencies. * However, in India, the gradual weakening of the second wave of the pandemic from July 2021 onwards, coupled with progress in vaccination, has helped the economy recover. Overall, from April to October 2021, the fiscal deficit, current account deficit and all other deficits of the central government have reduced. * India’s corporate sector too is gaining strength and has shown resilience through the pandemic. The financials of non-financial listed companies have improved. Bank credit too is growing. However, micro, small and medium enterprises (MSMEs) and microfinance institutions are still showing signs of stress. * Though banks’ growing GNPAs are indeed a source of concern, their capital adequacy position has remained healthy. Banks’ capital to risk-weighted assets ratio (CRAR) touched a new peak of 16.6 percent in September 2021, while their provisioning coverage ratio (PCR) stood at 68.1 percent, up from 67.6 percent in March 2021. * The proliferation of private crypto currencies across the globe is a source of risk, but one which regulators and governments have become well aware of. Not only is customer protection compromised by crypto currencies on which central banks have no control, they can also be used for money laundering and financing of terrorism. Given their highly speculative nature, crypto currencies can be subject to extreme price volatility and outright fraud as well. * The upturn in consumer credit is led by demand in the personal loan and credit card segments. In the other product categories too, demand is stabilising. Lending activity across all lender categories, barring public sector banks, shows signs of accelerated credit growth after the second wave. * The housing market is regaining momentum. After a prolonged period of negative growth, house sales showed the first signs of recovery during the second quarter of 2021-22. Support measures adopted by the government to boost the housing sector, a low interest rate environment and improved consumer confidence in the sector have all helped to step up demand, leading to a steep increase in the launch of new housing projects in the last four quarters. * Despite the uncertain and volatile global economic environment, India’s external sector has remained stable and viable. In 2020-21, the current account deficit was lower than in 2019-20, while net receipts from services were higher. Thanks to this, India achieved a surplus of 0.9 percent in its current account balance in the first quarter of 2021-22, compared to a deficit of 1.0 percent in the last quarter of 2020-21. * Foreign direct investment (FDI) and banking capital both recorded large inflows during the first quarter of 2021-22, with foreign exchange reserves rising to $31.9 billion on a balance of payments (BoP) basis. * Despite the heightened global uncertainty, the dollar-rupee exchange rate remained steady up to mid-November 2021. Since then, however, till about mid-December, the rupee has been trading lower, mainly due to foreign portfolio outflows, a stronger US dollar and uncertainty on the pace of tapering by the US Federal Reserve. Overall, the rupee has depreciated by 1.73 percent since end-June 2021 against the US dollar. * The bull-run in global equity markets across the globe has also influenced the Indian market, which has shown strong rallies with intermittent corrections. Domestic institutional investors (DIIs) were net buyers during April-November 2021, offsetting to an extent the pullout by foreign portfolio investors. Mutual funds were the principal drivers, while insurance companies were net sellers during this period.

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