The year ended with cautious optimism as the RBI, the ever-vigilant custodian of India’s monetary health, gave the country sterling grades in its Financial Stability Report (FSR) – December 2022. The governor, Shaktikanta Das expressed his view that amidst global shocks and challenges, the Indian economy presents a picture of resilience. Its financial stability has been maintained and domestic financial markets have remained stable and fully functional. More importantly, the Indian banking system is sound and well-capitalised and the non-banking financial sector has also withstood challenges.
The Reserve Bank’s latest Systemic Risk Survey (SRS) endorsed this view. Respondents viewed monetary tightening in advanced economies, tightening of financial conditions, geo-political risks, global growth uncertainty and growing risks from private crypto-currencies and climate change as major contributors to the rise in global, financial market and general risks.
However, when it came to India, the majority of the respondents saw further improvement in credit prospects and remained confident about the stability of the Indian banking sector. In fact, almost 99% of respondents believed that the prospects of the Indian banking sector were likely to improve or remain unchanged over the next one year.
Facts on the ground point to the same conclusions. Domestically, there has been buoyant demand for bank credit and the RBI sights early signs of a revival in the investment cycle. As a result, banks are experiencing improved asset quality, a return to profitability and strong capital and liquidity buffers for scheduled commercial banks (SCBs). Even gross non-performing assets of SCBs have fallen to a seven-year low of 5% while net non-performing assets (NNPA) have dropped to ten-year low of 1.3% in September 2022. With respect to the NBFC sector, the FSR noted a strong recovery in the wake of the second wave of COVID-19, with asset quality showing a continuous improvement. The GNPA ratio of the sector (excluding core investment companies) fell from 6.9% in June 2021 to 5.1% in September 2022.
Even the MSME sector, which was battered by the pandemic, showed signs of a turn-around in H2 FY2021-22 and sustained this momentum in H1 FY2022-23. The overall GNPA ratio in the MSME sector fell from 9.3% in March 2022 to 7.7% in September 2022.
Consumer credit, which was a major driver of bank credit in recent years is showing signs of moderation based on inquiry volumes, with the volume of inquiries for all categories of loans falling in October 2022 although they remain above pre-pandemic levels.
FinTech platforms, which have experienced robust inquiry volumes since the second wave of the pandemic, also saw growth stabilising. Overall, the quality of incremental credit has improved, with the share of lower rated borrowers declining at the overall industry level.
Essentially, India’s stress test results in the December 2022 FSR indicate that banks should be able to withstand even severe stress conditions, if they materialise. And additionally, in spite of formidable global headwinds, India’s external accounts remain well-cushioned and viable.
Based on all these developments, the RBI Governor advises that in the near future, India must continue to focus on management of climate change, further strengthen buffers of its financial system, harness fintech innovations and deepen financial inclusion. He also went on to assure that these facets will continue to receive priority attention from regulators and policy makers.
Now, the most interesting observation of the report is that with cumulative extraordinary shocks over the past three years, the international economic order is being challenged. It has led to financial markets falling into turmoil due to monetary tightening in most parts of the world, food and energy supplies and prices getting stressed and debt distress staring at many emerging market and developing economies.
India’s monetary and financial foundations appear ready to support strong and sustainable growth. Hence, amidst all this disruption and with economies across the globe grappling with multiple challenges, the report points out that India is well-positioned to play a leading role on the world stage, particularly with its G20 presidency.
The Union Budget – 2023, presented on this encouraging landscape, has the opportunity to further cement stability and can build more sustainable growth, knowing that India’s financial foundations are robust. It will also be closely watched to see if India does leverage its current economic advantage to position itself as a beacon for the global economy.