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The BSE Bank Index is down in the deep red. Currently down 3.5%, all the 10 stocks covered in this index are down, with ICICI Bank being the biggest loser – this is despite the good earnings and analysts bullish about the stock and are predicting a 40-45% upside. HDFC Bank, Axis Bank, Bandhan Bank, Federal Bank and IDFC First Bank – all are close on its heels in this downward trajectory.

The financial sector as a whole took a beating on the back of the Financial Stability Report (FSR) released by RBI on Friday evening. And it has not painted a pretty picture. We hate to be doomsday sayers but there is indeed trouble on the horizon.

As the name suggests, this report highlights the risks to financial stability, exposes the vulnerabilities in the financial system and in the face of all this, it gives us insights into how the financial institutions will build the resilience to overcome these challenges.

Take a quick look at the some of the salient points mentioned in the FSR:

  • Macro stress tests for credit risk indicate that the GNPA ratio of all Scheduled Commercial Banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 per cent under a very severely stressed scenario.


  • Bank credit, which had considerably weakened during the first half of 2019-20, slid down further in the subsequent period with the moderation becoming broad-based across bank groups.


  • The profitability ratios of SCBs, although better in FY 2019-20 relative to FY 2018-19, have declined in the second half of FY 2019-20 and the outlook is weighed down by the moratorium’s implications for loan classification.


  • The system-level1 capital to risk-weighted assets ratio (CRAR) may fall from 14.6 per cent in March 2020 to 13.3 per cent (11.8 per cent in a very severe stress scenario) by March 2021.


  • Banks' exposure to NBFCs/HFCs has increased. Contagion risks through financial networks have moderated due to higher capital buffers as also the shrinking interbank market.


  • Sectorally, the quality of bank loans to services sector worsened in March 2020. The GNPA ratio of the retail loan sector also edged up.


  • Among major sub-sectors within industry, GNPA ratios in respect of construction and gems and jewellery sectors swelled up in March 2020.


  • The infrastructure sector (with a share of 36.2 per cent in bank credit to the industrial sector), basic metals (11.3 per cent) and electricity (17.5 per cent) have shown a perceptible decline in GNPA ratios. This has implications for aggregate asset quality of the banking sector.


  • Stress test results indicate that, five banks may fail to meet the minimum capital level by March 2021 in a very severe stress scenario. This, however, does not take into account the mergers or any further recapitalization, which will further increase systemic resilience.


  • There will inevitably be an increased stress in the financial system.


  • The banking system may need to augment its capital to cater to a post-COVID-19 revival in the economy.


  • A shrinking inter-bank market along with higher capitalisation have moderated the interbank contagion risks.


  • While the exposure of mutual funds to NBFCs/HFCs moderated, the same of banks increased. Mutual funds have to improve their liquidity framework to contain spillovers.

Looking ahead, RBI has said, “Overall, there is an unprecedented uncertainty about global growth, though financial markets have broadly stabilised in response to unprecedented fiscal and monetary stimulus. A combination of fiscal, monetary and regulatory interventions in India has kept financial markets from freezing and financial intermediaries functioning normally. Bank credit shows clear signs of risk aversion. Nonbank intermediation, after facing turbulent times, is stabilising as a result of timely and calibrated regulatory interventions. Capital flows are tentatively picking up even as external financing needs remain subdued. Commodity market spillovers, except for oil, remain contained. Adequate levels of foreign exchange reserves provide a buffer. While the uncertainties still remain, restarting financial sector reforms on their path of convergence with global best practices and standards while adapting to the specific requirements of India’s developmental strategy should be the focus, going forward.”

For more details into RBI’s FSR - https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1153

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