Summary of

Financial Stability
Report

th
June 2023 (27 )
27th Financial Stability Report (June 2023)

Contents
1 - What is RBI’s FSR Report? ............................................................................................. 3
2 – Summary of the FSR ....................................................................................................... 3

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27th Financial Stability Report (June 2023)

1 - What is RBI’s FSR Report?

The FSR which is published biannually reflects the collective assessment of the Sub-
Committee of the Financial Stability and Development Council (FSDC - headed by the
Governor of RBI) on risks to financial stability and the resilience of the financial system.
The Report also discusses issues relating to development and regulation of the financial
sector.

2 – Summary of the FSR

2.1 Macro financial Risks

Banking Sector –
❖ The Indian financial system, led by a sound banking system, remains stable and
supportive of the productive needs of the economy.
❖ Aided by robust earnings, adequate capital and liquidity buffers and improving
asset quality, Indian banks are well positioned to sustain the upturn in the credit
cycle that has been underway since early 2022.

Non-financial Sector Debt Burden –

❖ Debt levels in all three components of the nonfinancial sector, viz., governments,
non-financial corporates and households remain high, though they have marginally
declined from the pandemic period peaks.
❖ A tightening monetary policy cycle, high private debt levels impact aggregate
demand through multiple channels.

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o First, they lower disposable income by increasing debt service costs.

o Second, they strain the balance sheets of businesses and households.
o Third, by distributing income from debtors with high marginal propensity to
consume to savers with less propensity to spend, they reduce aggregate
demand, especially if the share of variable rate and short-maturity debt is
high.
Climate Change –
❖ Climate change is recognised as a strong theme for coordinated policy action.
Global efforts to reduce carbon emissions and transition to a greener economy
would require massive investment in most countries.
❖ The average yearly investment needed to complete the transition so that emissions
hit net zero by 2050 is projected at US$ 5 trillion (estimates range from US$1.9
trillion to US$ 9.2 trillion) for the next three decades.

Growth of Digital Finance –

❖ Digital money and payments systems are transforming the global finance
landscape, with profound implications for the international monetary and financial
system.
❖ Digital innovations contribute to welfare gains by smoothening business processes
and facilitating customer services.
❖ They are, however, also vulnerable to quick system-wide disruptions with amplified
spillovers.
❖ Appropriate safeguards are, therefore, required to be built into their design,

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regulation and integration with existing systems, taking into account their
ramifications for currency substitution, capital flows and financial disintermediation.

Domestic Growth and Inflation –

❖ Buoyed by both private and government consumption demand, rising investment
and improving consumer and business optimism, India’s real GDP grew by 5.3 per
cent in H2:2022-23 and is projected to grow by 6.5 per cent in 2023-24.

Government Finance –
❖ In 2022-23 (PA), the government achieved its budgeted gross fiscal deficit (GFD)
target of 6.4 per cent of GDP, as higher subsidy payouts on the back of elevated
commodity prices were offset by buoyant direct tax and Goods and services tax
(GST) collections Year-on-year (y-o-y) growth in capital expenditure stood at 24.2
per cent, visà- vis revenue expenditure growth of 7.9 per cent, reflecting the
ongoing improvement in the quality of expenditure.
❖ On the receipts side, gross tax revenue is budgeted to increase by 10.1 per cent,
with direct and indirect taxes expected to grow at 9.8 per cent and 10.4 per cent,
respectively.
❖ The centre’s debt-to-GDP ratio at 60.1 per cent in 2021-22 is budgeted to decline to
57.8 per cent in 2023-24 as fiscal rectitude continues.

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❖ Net market borrowings of the central government during 2023-24 is budgeted at 3.9
per cent of GDP28 vis-à-vis the pre-pandemic (2018- 2020) average of 2.4 per cent
of GDP.

State Fiscal Position –

❖ States’ fiscal position has witnessed a sharp revival from the pandemic-induced
deterioration seen during 2020-21.
❖ The consolidated gross fiscal deficit (GFD) of states and Union Territories (UTs)
declined from the peak of 4.1 per cent of GDP in 2020-21 to 2.8 per cent in 2021-22
and has remained at the same level in 2022-23 as well, which is much lower than
the budget estimate of 3.4 per cent for the year.

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Balance of Payment –
❖ External sector sustainability has improved on the back of strong exports of
services and a narrowing of merchandise trade deficit, which fell to US$ 22.1 billion
in May 2023 from a peak of US$ 28.0 billion in September 2022.
❖ India’s current account deficit (CAD) narrowed to 0.2 per cent of GDP (at current
market prices) in Q4:2022-23 from 3.8 per cent and 2.0 per cent in Q2 and Q3 of
2022-23, respectively.
❖ As net capital inflows exceeded the CAD, there was an accretion to the foreign
exchange reserves to the tune of US$ 5.6 billion on a balance of payments (BoP)
basis during Q4:2022-23.

Financial System Stress Indicator –

❖ In the last issue of the FSR, the financial system stress indicator (FSSI) was
presented as a monitoring tool for aggregate stress levels in the Indian financial
system.
❖ The FSSI shows that the overall stress in the domestic financial system eased in
Q4:2022-23 relative to Q3:2022-23, driven by general improvement in stress factors
across banking and non-banking sectors.

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Systemic Risk Survey –

❖ As per the systemic risk survey conducted in May 2023, risk perception across all
major categories of systemic risk except institutional risk has receded. Global
spillovers remained in the ‘high’ risk category.
❖ Financial market risk declined to the ‘medium’ risk category from ‘high’ risk.
Macroeconomic risk remained in the ‘medium’ risk category and was perceived to
have moderated.

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2.2 Financial Institutions: Soundness & Resilience

Scheduled Commercial Bank

❖ Aggregate deposits growth, which had undergone a slight moderation during 2021-
22 and H1:2022-23, picked up pace to reach 11.8 per cent as on June 02, 2023.
This growth was mainly driven by private sector banks (PVBs).
❖ The asset quality of SCBs continued to improve and their GNPA ratio declined to
3.9 per cent in March 2023 – a 10-year low. SCBs’ NNPA ratio5 also improved to
1.0 per cent, a level last observed in June 2011, indicative of active and deep
provisioning.
❖ The share of large borrowers in gross advances of SCBs declined successively
over the past three years (viz., from 51.1 per cent in March 2020 to 46.4 per cent in
March 2023) as retail loans grew faster than borrowings by corporates. The share
of large borrowers in the GNPAs of SCBs also came down substantially (viz., from
75.7 per cent in March 2020 to 53.9 per cent in March 2023).
❖ SCBs sustained the momentum in profitability as their net interest margin (NIM)
continued to grow. SCBs’ profit after tax (PAT) recorded a healthy growth of 38.4
per cent (y-o-y) during 2022-23, led by strong increase in net interest income (NII)
and lowering of provisions. PAT of PSBs grew at a faster rate than that of PVBs
whose operating expenses increased by 29.4 per cent.

Primary (Urban) Cooperative Banks

❖ Credit growth (y-o-y) of primary urban cooperative banks (UCBs)35 increased from
3.4 per cent in September 2022 to 5.7 per cent in March 2023. Both scheduled
UCBs (SUCBs) and non-scheduled UCBs (NSUCBs) contributed to this pick-up,
with their credit growth reaching 6.7 per cent and 4.9 per cent, respectively.
❖ Priority sector lending (PSL) by both SUCBs and NSUCBs stood at around 65 per
cent of their outstanding credit on March 31, 2023.
❖ The dates to achieve PSL targets of minimum 60, 65 and 75 per cent have been
extended upto March 31, 2024, March 31, 2025 and March 31, 2026 respectively
❖ The CRAR of UCBs improved marginally in H2:2022-23 to reach 16.5 per cent in
March 2023.

Non-Banking Financial Companies (NBFCs)

❖ After reaching double digits in September 2022, annual growth of credit disbursed
by NBFCs sustained pace, with personal loans rising by 31.3 per cent and loans to
industry by 12.7 per cent (y-o-y) in March 2023.
❖ As per the activity-based classification, the largest two categories, namely,
investment and credit company (NBFC-ICC) and infrastructure finance company
(NBFC-IFC), with shares of 54 per cent and 40 per cent, respectively, in
outstanding credit registered double digit credit growth in March 2023.
❖ Micro finance institutions (NBFC-MFIs) have maintained robust credit growth over
the past two years (with a CAGR 27.6 per cent).
❖ The GNPA ratio of NBFCs continued to decline during H2:2022-23, with industry
and services each registering more than two percentage points reduction.

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Deposit Insurance
❖ The deposit insurance premium received by DICGC grew 9.7% to Rs. 21,381 crore
during FY23. Of this, the share of the commercial banks was 94%.
❖ The Deposit Insurance Fund (DIF) with DICGC rose 15.5% during FY23 to reach
1.70 trillion on March 31, 2023.
❖ Deposit Insurance and Credit Guarantee Corporation settled claims of Rs. 751.8
crore during FY23.
❖ With the present deposit insurance limit of Rs. 5 lakh, 98.1%of the deposit accounts
and 46.3% of the assessable deposits were insured.
❖ The insured deposits amounted to Rs. 83.89 trillion as of March 31, 2023.

2.3 Regulatory Initiatives

Note in this section the FSR discusses the initiative taken which are through covered from
exam perspective under the RBI Circulars. Please read it from there.

Note – The Summary must be topped up with the given MCQ as multiple things have been
covered through MCQ.

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