As the RBI points out, the crisis in NPAs and NBFCs has been alleviated but fintech poses a problem
The key takeaway from Reserve Bank of India’s latest Financial Stability Report (FSR) for June 2022 is that synchronised monetary tightening by central banks and the Russia-Ukraine war now pose looming risks to global financial stability. For emerging markets, this could trigger asset sell-offs and market dislocations, expose markets to capital flight and governments to debt servicing woes. But the report seems sanguine about India’s ability to weather this storm, noting that its economy and financial system have been able to ‘decouple’ from global events since December 2021, helped by strong macro-fundamentals and sound financial institutions. External risks from rising global yields, a worsening current account and FPI pullouts do get a mention, but the report takes comfort from India’s large forex reserves and the relative resilience of the Rupee so far.
The report does show that the Indian economy has put its twin balance sheet problem behind it, with India Inc sitting on low debt levels and domestic financial institutions emerging strong from the pandemic shock. Commercial banks have seen their GNPAs moderate from 8.5 per cent in March 2020 to 5.9 per cent by March 2022 (a six-year low), with provision coverage improving to 70.9 per cent. CRAR (capital adequacy) has improved from 14.8 to 16.7 per cent, against the regulatory minimum of 9 per cent. NBFCs and Urban Co-operative Banks (UCBs) have also shown material improvement with CRARs of NBFCs at 26.7 per cent and UCBs at 15.8 per cent, while NPAs in both cases have moderated. Much of the credit for this resilience must go to RBI. After providing liberal liquidity lifelines to banks and NBFCs during the pandemic, RBI has orchestrated a timely withdrawal of this liquidity support ahead of other global central banks, shielding them from abrupt liquidity shocks. The RBI’s efforts to reduce regulatory arbitrage between commercial banks, UCBs and NBFCs, have also contributed in big measure to their sound capital and liquidity buffers today. However, the FSR does show that in a severe stress scenario where macro variables deteriorate sharply, there could be risks to the latter. While commercial banks would remain safe, but about 10 per cent of the NBFCs and over 20 per cent of UCBs would be at risk of failure. RBI and the Centre therefore need to quickly thrash out a standard resolution process for large financial institution failures, which have so far been resolved through ad-hoc takeovers.
The FSR discusses in detail Indian regulators’ concerns around the crypto ecosystem. Though cryptos currently account for a fraction of the financial system and aren’t inter-connected, they bypass anti-money-laundering and anti-terrorism laws and erode capital account regulation, thus weakening central banks’ exchange rate management. But having raised such red flags, the report is silent on a ban and veers off to CBDC (central bank digital currency) as a solution to this problem. The fintech sector however, may need to brace for action. The FSR highlights that the advent of fintech has exposed India’s banks to new risks extending beyond prudential issues, and has flagged worries relating to data privacy, cyber security, consumer protection and compliance with anti-money laundering rules. Having bridged the regulatory arbitrage between banks and NBFCs, fintech players may be next on RBI’s regulatory radar.
Published on July 03, 2022