Unravelling the Highlights and Concerns of RBI's Financial Stability Report, June 2024

 

  •  Meet the Report: RBI's Bi-Annual Financial Stability Analysis

 

-RBI's Financial Stability Report (FSR) released in June 2024 assesses India's financial resilience in the context of international uncertainties.

-The report highlights the worrisome rise in digital personal loans and their potential impact on financial stability measures.

 

  •  Dissecting the Financial Stability Report: Key Takeaways

 

-*Global Macrofinancial Risks:* According to FSR, the global financial system is resilient despite heightened  uncertainties.  The  IMF  anticipates

global growth to hover at 3.2%, while the World Bank projects a 2.6% rate.

-*Domestic Macrofinancial Risks:* The Indian economy continues to grow backed by strong macroeconomic fundamentals, anchored inflation, strong external position, and continuing fiscal consolidation.

-*Quality of Assets:* The Gross Non-Performing Asset (GNPA) ratio of Scheduled Commercial Banks (SCBs) has reduced to 2.8% (March 2024), the lowest in 12 years, indicating improving asset quality.

-*Deposits and Credit Growth:* Deposit growth rose to 13.5% in the quarter ending March 2024. Credit growth also stood healthy at 19.2% but was a bit lower than the previous half-year period.

-*Personal Loans and Related Concerns:* Despite low GNPA proportions, RBI expresses concern over the potential financial instability from personal loans accessed through digital apps.

 

  •  Decoding Non-Performing Assets (NPAs)

 

-These are loans made by banks or financial institutions that are in risk of default.

-Non-performing assets are a significant element in assessing the financial health of banking institutions. High NPA implies bad credit decisions, impacting the profitability and liquidity.

 

  •  Digital Personal Loans: A Rising Concern

 

-*Emergence and Growth:* Post-2017, banks shifted focus to retail sectors including personal loans, fueling the growth of the digital lending market estimated at USD 350 billion by 2023.

-*Potential Risks:* These easily accessible loans potentially lead to over-borrowing and financial distress. This is substantiated by high delinquency levels for personal loans, especially for amounts below Rs 50,000.

-*RBI's Stance:* RBI is concerned with the increasing share of retail loans outdoing industrial and service loans, hence putting in place regulatory measures to control the rise.

 

  •  Understanding Digital Personal Loans

 

-These are loans provided through mobile applications or online platforms with a seamless application process, paperless mechanisms, and quick approvals.

-While it aids in reaching the unbanked and underbanked populations, thus promoting financial inclusion, it carries the risk of over-borrowing.

 

  •  Recovering Digital Personal Loans: Measures to be Adopted

 

-*Use of FinTech:* Encourage Fintech companies to develop automated repayment plans, debt consolidation options, and monitor loan performance.

-*Improved Credit Assessment:* Alternatives credit scoring models can be explored that include income stability and financial behaviour patterns.

-*Legal and Policy Interventions:* Use Debt Recovery Tribunals (DRT), SARFAESI ACT, 2002, and the Insolvency and Bankruptcy Code, 2016, to efficiently recover dues.

 

Note: The FSR is a critical document that reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC), helmed by the RBI Governor. It is bi-annually published and is a significant guide in understanding the state of India's financial stability.