FINANCIAL STABILITY REPORT: ENDING 2015 WITH A HIGH NOTE

Financial stability report was presented by RBI on 23^rd December 2015. The major issue discussed by the media was with respect to dividend policy followed by the PSU banks. The other major highlights went unreported. The financial stability report is a confirmation of the improved macro-economic conditions and lower domestic risks present in our economy. The central bank accepts the fact that despite improved macro economic fundamentals, domestic demand remains weak and the government faces stiff challenge of going for higher public investment with stringent fiscal consolidation.

The major part of the report focuses on financial system and its major constituent, Indian banking sector. The banking sector has been facing increased risks due to deteriorating asset quality, lower soundness and sluggish profitability. Gross non performing assets ratio increased between March and September 2015, whereas restructured standard assets ratio declined. Without getting into numbers, PSU banks lagged behind its private sector peers with respect to asset quality, profitability and capitalization. The central bank also assessed NBFCs, insurance and pension sector and Indian capital markets which kept pace with the changing global scenario by creating special platform for start-ups. RBI has also recognized the role of domestic institutional investors especially mutual funds for being a stability factor against volatile foreign portfolio investment flows.

The systematic survey conducted by RBI indicated that global risks continued to be perceived as major risks facing our financial system compared to domestic macro economic risks which have receded over the last one year. Thus the Financial stability report concluded that India’s financial system remains stable and resilient with strong macro-economic fundamentals against global uncertainty and its inherent risks.