RBI: Bank NPA ratio at 6-year low, but fintechs expose system to new risks

• As per the RBI’s biannual Financial Stability Report., asset quality of the banking system has improved.
• Gross Non-Performing Assets (GNPA) ratio declined from 7.4 per cent in March 2021 to a six-year low of 5.9 per cent in March 2022.

Financial Stability Report:

• Released by the RBI twice a year.
• Details the state of financial stability in the country.
• As part of the FSR, the RBI also conducts a Systemic Risk Survey (SRS), wherein it assess the financial system on five different types of risks:
• Global; Financial; Macroeconomic; Institutional; General.

Significance of FSR:

• Tells how robust or vulnerable our financial system is to the changes in the economy.
• Tells us whether and to what extent will our banks and other lending institutions be able to support future growth.

Key takeaways from the latest FSR:

Indian economy:

• On the path of recovery, though inflationary pressures, external spill overs and geopolitical risks warrant careful handling and close monitoring.
• The external sector is well-buffered to withstand the ongoing terms of trade shocks and portfolio outflows.

Asset quality of Banks:

• Asset quality of banks improved steadily throughout the year, with gross NPA ratio declining to a six-year low of 5.9% in March 2022 from 7.4% in 2021.
• NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• The banking stability indicators showed improvement in soundness, efficiency and market risk dimensions in the second half of FY22.

Stock market:

• The number of demat accounts of individuals increased 3.4 times on CDSL and 1.5 times on NSDL since January 2020.
• CDSL : Central Depository Securities Limited
• NSDL : National Securities Depository Limited
• Both are depositories registered by the Indian government to hold multiple forms of securities like stocks, bonds, ETFs, and more as electronic copies.

Fintech industry:

• The Indian fintech industry was valued at $50-60 billion in 2020 and is projected to reach $150 billion by 2025.
• These risks extend beyond prudential issues and often intersect with other public policy objectives relating to safeguarding of data privacy, consumer protection, etc.

Cryptocurrencies:

• While technology has supported the reach of the financial sector and its benefits must be fully harnessed, its potential to disrupt financial stability has to be guarded against.
• The report has flagged cryptocurrencies as a clear danger among the emerging risks on the horizon.
• The report highlights that anything that derives value based on make believe, without any underlying, is just speculation under a sophisticated name.