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What you need to know from RBI’s Financial Stability Report

The recent bank credit off-take needs close monitoring as there has been higher lending to MSMEs and other sectors which were hit badly by the pandemic

July 01, 2022 / 04:21 PM IST

The Reserve Bank of India’s latest Financial Stability Report says that a “noteworthy feature” amidst the current dynamic and the uncertain macroeconomic situation is the “overall resilience of the financial institutions”, navigating the waves of the COVID-19 pandemic and bolstered by the risk absorption capacity.

This robust assessment of the financial sector is critical for the Indian economy amidst global headwinds and tightening liquidity, which could severely pose a threat to macroeconomic and financial stability.

Despite the positives, one cannot be absolutely certain that the improved asset quality of the financial sector and better profitability numbers could lead to a credit off-take and steer the private investment cycle, as the corporate sector sentiments have been severely dampened by the multiple lingering shocks and heightened uncertainty. Plus, we have entered a “rate-hike cycle” in the Indian economy, which means both consumers and corporates will weigh in the interest rate risks.

The asset quality (measured by gross non-performing asset ratio or GNPA ratio) of scheduled commercial banks continued to decline from 7.4 percent in March 2021 to a six-year low of 5.9 percent in March 2022 led by the support measures of RBI during the pandemic. This fall, along with a notable improvement in the provision coverage ratio from 67.6 percent in March 2021 to 70.9 percent in March 2022, does ensure that the major cleaning of the bad loans in the banking system is behind us.