Financial Stability Report

December 2024

Reserve Bank of India

© Reserve Bank of India
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Published by Financial Stability Department, Reserve Bank of India, Mumbai 400 001 and designed and printed at
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 Foreword
As the year 2024 draws to a close and a new year dawns, the global economy exhibits resilience in the face of
formidable headwinds from political and economic policy uncertainty, persisting conflicts and an environment
of fragmenting international trade and tariffs. Brightening the global prospects is the likelihood that the
decline in inflation will continue and align with targets during the year ahead, allowing purchasing power to
recover. As monetary policy gains headroom to further support economic activity, financial conditions can be
expected to remain easy and contribute to an improvement in the trajectory of global GDP from a prolonged
phase of low growth. Robust labour market and sound financial system too provide congenial conditions for
this turnaround.
The medium-term outlook, however, remains challenging, with downside risks from possible intensification
of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness.
Stretched asset valuations, fragilities in the less regulated non-bank financial intermediaries, and threats from
new and emerging technologies also add to the evolving uncertain outlook.
The resilience of financial systems can be tested if these risks materialise. Prudently, therefore, even as near-
term risks to financial stability appear to be receding, the national financial regulators and supervisors across
the globe remain on guard, scarred by the lessons drawn from experiences of black swan events such as the
global financial crisis and the pandemic as well as from episodic visitations of financial market volatility.
Further, they are maintaining their focus on strengthening the financial institutions while collaborating
with international standard-setting bodies to deepen regulatory reforms, especially in areas of possible
vulnerabilities in the global financial system.
Financial sector regulators in India too are intensifying reforms and sharpening their surveillance against the
backdrop of the soundness of the financial system bolstered by robust earnings, low levels of impaired assets
and strong capital buffers, as this report highlights. Stress test results reveal that capital levels of the banking
system as well as of the non-banking financial companies (NBFCs) sector will remain well above the regulatory
minimum even under adverse stress scenarios.
Notwithstanding the uncertainties shrouding the global macrofinancial ethos as it unfolds, prospects for the
Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half
of 2024-25. Consumer and business confidence for the year ahead remain high and the investment scenario is
brighter as corporations step into 2025 with robust balance sheets and high profitability.
As we strive to preserve financial stability to support a higher growth path for the Indian economy, our focus
remains steadfast on maintaining stability of financial institutions and, more broadly, systemic stability. We
continue to secure and anchor public trust and confidence to support India’s aspirational goals. We remain
committed to developing a modern financial system that is customer-centric, technologically leveraged and
financially inclusive.

Sanjay Malhotra
Governor
December 30, 2024
 Contents
Page No.
Foreword
List of Select Abbreviations i-iv
Overview 1
Chapter I : Macrofinancial Risks 3
Global Backdrop 5
Macrofinancial Development and Outlook 5
Global Macrofinancial Risks 7
High and Rising Levels of Public Debt 7
Asset Valuations and Volatility 9
Impact of Artificial Intelligence 12
Domestic Macrofinancial Risks 14
Domestic Growth and Inflation 14
External Sector 15
Corporate Sector 17
Government Finance 19
Household Finance 21
Financial Markets 23
Banking Stability Indicator 34
Banking System 35
Emerging Technology Risks 41
Non-Banking Financial Companies 43
Non-Banking Stability Indicator 45
Microfinance 47
Consumer Credit 49
Mutual Funds 53
Financial System Stress Indicator 55
Systemic Risk Survey 55
Chapter II : Financial Institutions: Soundness and Resilience 58
Scheduled Commercial Banks (SCBs) 58
Asset Quality 60
Sectoral Asset Quality 62
Credit Quality of Large Borrowers 63
Capital Adequacy 65
Earnings and Profitability 65
Liquidity 67
Resilience – Macro Stress Tests 67
Sensitivity Analysis 72
Bottom-up Stress Tests: Derivatives Portfolio 82
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Primary (Urban) Cooperative Banks 83

Stress Testing 83
Non-Banking Financial Companies (NBFCs) 87
Stress Test - Credit Risk 89
Stress Test - Liquidity Risk 91
Stress Testing of Mutual Funds 91
Stress Testing Analysis at Clearing Corporations 92
Insurance Sector 93
Interconnectedness 94
Financial System Network 94
Contagion Analysis 101
Chapter III : Regulatory Initiatives in the Financial Sector 106
Global Regulatory Developments 106
Markets and Financial Stability 106
Technology and Financial Stability 107
Banking and Financial Stability 109
Non-Banking Financial Intermediation and Financial Stability 109
Cross-Border Payments and Financial Stability 110
Climate Finance and Financial Stability 110
Domestic Regulatory Developments 111
Initiatives from Regulators / Authorities 111
Directions on Fraud Risk Management to Regulated Entities 111
Prompt Corrective Action Framework for Primary (Urban) Co-operative Banks 112
Treatment of Wilful Defaulters and Large Defaulters 112
Cyber Resilience and Digital Payment Security Controls for Non-Bank Payment 112
System Operators
Scheme for Trading and Settlement of Sovereign Green Bonds in the 113
International Financial Services Centre in India
Irregular Practices in Gold loans 113
Recognition of Central Counterparties by Foreign Regulators 113
Strengthening of Foreign Portfolio Investors Norms 113
Association of Persons Regulated by SEBI and their Agents with Certain 114
Persons (‘Finfluencers’)
Valuation of Additional Tier 1 Bonds (‘AT-1 Bonds’) 114
Measures to Strengthen Equity Index Derivatives Framework 114
Review of Eligibility Criteria for Entry/Exit of Stocks in Derivative Segment 115
Review of Stress Testing Framework for Equity Derivatives Segment 115
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Monitoring of Position Limits for Equity Derivatives Segment 115

Review of Small and Medium Enterprises framework 116
Cybersecurity and Cyber Resilience Framework for SEBI regulated entities 116
Framework of Financial Disincentives for Surveillance Related Lapses at 117
Market Infrastructure Institutions
Upstreaming of Clients’ Funds by Stock Brokers/ Clearing Members to Clearing 117
Corporations
Specific Due Diligence of Investors and Investments of Alternative Investment 118
Funds
Institutional Mechanism by Asset Management Companies for Deterrence of 118
Potential Market Abuse
Use of Artificial Intelligence in the Financial Sector 118
Other Developments 119
Customer Protection 119
Enforcement 119
Deposit Insurance 120
Corporate Insolvency Resolution Process 121
Developments in International Financial Services Centre 124
Pension Funds 124
Insurance 126
Annex 1: Systemic Risk Survey 129
Annex 2: Methodologies 134
Annex 3: Important Domestic Regulatory Measures 146
Reserve Bank of India (RBI) 146
Securities and Exchange Board of India (SEBI) 150
Insurance Regulatory and Development Authority of India (IRDAI) 154
Pension Fund Regulatory and Development Authority (PFRDA) 156
Insolvency and Bankruptcy Board of India (IBBI) 158
International Financial Services Centres Authority (IFSCA) 160
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LIST OF BOXES
Chapter I
1.1 Transmission of Global Spillovers to Domestic Financial Conditions 33
1.2 Emerging Technologies in Indian Banks 41
1.3 Non-Banking Stability Indicator 45

Chapter II
2.1 Revised Macro-Stress Testing Framework 68
2.2 Revamped Liquidity Stress Test of SCBs based on LCR framework 80
2.3 Identification of Impactful and Vulnerable Banks 102

LIST OF CHARTS
Chapter I
1.1 Global Growth Projections 3
1.2 Policy Rate and Inflation 4
1.3 Banking Sector Soundness Indicators 5
1.4 Downside Risks to Global Growth Outlook 5
1.5 Financial Conditions 6
1.6 Uncertainty and Volatility 6
1.7 Public Debt-to-GDP Ratio and Forecast Errors 7
1.8 Public Debt and Interest Burden 8
1.9 Debt Vulnerabilities in EMDEs 9
1.10 Equity Market Performance and Valuation 9
1.11 Credit Spreads and Government Bond Yields 10
1.12 Carry Trade and Volatility 10
1.13 Movement of Major Currencies against the US Dollar during August 1-5, 2024 11
1.14 Crypto-assets and Stablecoins 11
1.15 Global Spending on Artificial Intelligence 13
1.16 Market Concentration and Cyber Attacks 13
1.17 GDP Growth and Weighted Contribution of Components 14
1.18 Inflation 14
1.19 Uncertainties in Global Trade 15
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1.20 Trade Deficit, Service Exports and Private Transfers 15

1.21 Balance of Payments 16
1.22 External Vulnerability Indicators 17
1.23 Sales Growth of Listed Private NFCs 17
1.24 Profitability Trend (Growth and Margins) - Listed Private NFCs 17
1.25 Financing of Listed Private Non-Financial Companies 18
1.26 Debt Serviceability of NFCs 18
1.27 NFCs – Debt-to-Equity and Debt-to-GDP Ratios 19
1.28 Quality of Expenditure – Central Government 19
1.29 Debt Sustainability – Central Government 20
1.30 Debt and Interest Burden – State Government 21
1.31 India, AEs and EMDEs – Debt and Fiscal Deficit 21
1.32 Household Debt and Decomposition 22
1.33 Household (Individual) Borrowings from Financial Institutions (by Amount) 22
1.34 Distribution of Debt by Borrower Category 23
1.35 Per Capita Debt of Household (Individual) Borrower 23
1.36 Financial Conditions Index – India 23
1.37 Money Market Rates, Bond Yields and System Liquidity 24
1.38 CD Issuances and Money Market Spreads 24
1.39 Sovereign Yield Curve and Term Spread 25
1.40 Listed Corporate Bond Issuance and Subscription 25
1.41 Corporate Bond Spreads 26
1.42 Equity Market Performance 26
1.43 Equity Return Decomposition 27
1.44 Broader Equity Market Valuations 27
1.45 Midcap, Smallcap and Microcap Valuation 28
1.46 Earnings and Valuations 28
1.47 Trends in Net Investments 29
1.48 Demand for and Supply of Equities 29
1.49 Intraday Trading by Individuals in Equity Cash Segment 30
1.50 Exchange Rate Movements 31
1.51 Exchange Rate Stability Indicators 32
1.52 Banking Stability Map 35
1.53 Capital and Profitability 35
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1.54 Asset Quality 36

1.55 Banks Signalling Vulnerabilities in Three or More Areas of Risk 36
1.56 Loan-Deposit Divergence – Long Term Dynamics 37
1.57 Banking System – Balance Sheet Dynamics 37
1.58 Banks’ Funding Gap 38
1.59 Credit and GDP Growth and Credit-GDP Gap 38
1.60 Deposit Profile and Profitability 39
1.61 Incremental Credit and Growth Rate in Select Sectors 39
1.62 Write-offs and Movement in GNPA 40
1.63 Liquidity Coverage Ratio 41
1.64 NBFCs’ Loan Growth 43
1.65 Bank Lending to NBFCs and Bank Borrowings in NBFCs’ Liabilities 44
1.66 Foreign Currency Borrowings by Outlier NBFCs 44
1.67 NBFCs – Financial Indicators 44
1.68 Microfinance Sector – Credit and Borrowers 47
1.69 Stress in the Microfinance Sector 48
1.70 Indebtedness in the Microfinance Sector 48
1.71 Cost of Funds and Yield on Loans for NBFC-MFIs 49
1.72 Consumer Credit Growth 49
1.73 Inquiry Volumes and Approval Rates 50
1.74 Asset Quality of Retail Loans 50
1.75 Retail Loans at Risk 51
1.76 Category-wise Loan Originated with an Overdue Personal Loan 51
1.77 Consumer Loan Distribution by Risk Tier 52
1.78 Profile of Personal Loans by Income Group 53
1.79 Trend in Unsecured Personal Loans and Housing Loans by Income Group 53
1.80 Monthly SIP Contributions and Outstanding SIP Accounts 54
1.81 Net Inflows into Different Equity Schemes of Mutual Funds 54
1.82 Net Inflows in Open-Ended Equity-Oriented Schemes 55
1.83 Net Inflows in Open-Ended Debt-Oriented Schemes 55
1.84 FSSI and its Broad Components 56
1.85 Components of FSSI 56
1.86 Potential Risks to Financial Stability 56
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Chapter II
2.1 Deposit and Credit Profile of SCBs 59
2.2 Select Asset Quality Indicators 61
2.3 Sectoral Asset Quality Indicators 62
2.4 Select Asset Quality Indicators of Large Borrowers 63
2.5 Capital Adequacy 65
2.6 Select Performance Indicators of SCBs 66
2.7 Liquidity Ratios 67
2.8 Macro Scenario Assumptions 70
2.9 CRAR Projections 70
2.10 Projection of CET-1 Capital Ratio 71
2.11 Projection of SCBs’ GNPA Ratios 71
2.12 Impact of Liquidity Risk on Solvency 72
2.13 Credit Risk - Shocks and Outcomes 73
2.14 Credit Concentration Risk: Individual Borrowers – Exposure 73
2.15 Credit Concentration Risk: Group Borrowers – Exposure 74
2.16 Credit Concentration Risk: Individual Borrowers – Stressed Advances 75
2.17 AFS and FVTPL (including HFT) Portfolios: Bank – Group wise 76
2.18 Yield Curves and Shift in Yields across Tenors 78
2.19 HTM Portfolio – Composition 78
2.20 HTM Portfolio – Unrealised Gain/ Loss 79
2.21 Equity Price Risk 80
2.22 MTM Position of Total Derivatives Portfolio of Select Banks 82
2.23 Impact of Shocks on Derivatives Portfolio of Select Banks 82
2.24 Income from the Derivatives Portfolio 83
2.25 Credit Profile and Asset Quality Indicators of UCBs 84
2.26 Stress Test of UCBs 86
2.27 Credit Profile of NBFCs 87
2.28 Growth and Delinquency of Components of Retail Loans 88
2.29 GNPA Ratio 88
2.30 Provision Coverage Ratio 89
2.31 Capital Adequacy and Profitability 89
2.32 Liquidity Stock Measures 90
2.33 Credit Risk in NBFCs - System Level 90
2.34 Range (Surplus (+)/ Deficit (-)) of LR-RaR Maintained by AMCs over AMFI Prescribed Limits 92
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2.35 Range (Surplus (+)/ Deficit (-)) of LR-CRaR Maintained by AMCs over AMFI Prescribed Limits 92
2.36 Bilateral Exposures between Entities in the Financial System 95
2.37 Instrument-wise Exposure among Entities in the Financial System 95
2.38 Network Plot of the Financial System 95
2.39 Net Receivables (+ve)/ Payables (-ve) by Institutions 96
2.40 Inter-Bank Market 96
2.41 Share of Different Bank Groups in the Inter-Bank Market 97
2.42 Composition of Fund based Inter-Bank Market 97
2.43 Network Structure of the Indian Banking System (SCBs + SFBs + SUCBs) 98
2.44 Connectivity Statistics of the Banking System (SCBs) 98
2.45 Gross Receivables of AMC-MFs from the Financial System 99
2.46 Gross Receivables of Insurance Companies from the Financial System 99
2.47 Gross Payables of NBFCs to the Financial System 100
2.48 Gross Payables of HFCs to the Financial System 100
2.49 Gross Payables of AIFIs to the Financial System 101
2.50 Contagion Impact of Macroeconomic Shocks (Solvency Contagion) 105

Chapter III
3.1 Summary of Outcomes - Resolution to Liquidation ratio 123
3.2 NPS and APY – Subscribers and AUM Trend 125
3.3 NPS and APY AUM: Asset Class-wise Bifurcation (per cent of Total AUM) 125

LIST OF TABLES
Chapter I
1.1 Sovereign Rating of G20 Economies 8
1.2 Capital Flows 16
1.3 Hedging Status of ECB Loans 16
1.4 Central Government Finances - Key Deficit Indicators 19
1.5 State Governments - Key Deficit Indicators 20
1.6 Returns of Nifty Benchmark Indices 27
1.7 Assets under Management of the Domestic Mutual Fund Industry 54
1.8 Summary of Stress Tests and Liquidity Analysis of Midcap and Smallcap MF Schemes 55
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Chapter II
2.1 Decline in System Level CRAR 75
2.2 PV01 of AFS and FVTPL (including HFT) Portfolios 77
2.3 Interest Rate Risk – Bank-groups - Shocks and Impacts 77
2.4 Other Operating Income - Profit/ (Loss) on Securities Trading – All Banks 78
2.5 Earnings at Risk - Traditional Gap Analysis 79
2.6 Market Value of Equity - Duration Gap Analysis 80
2.7 NBFCs’ Sources of Funds 90
2.8 Liquidity Risk in NBFCs 91
2.9 Stress Testing of Open-Ended Debt Schemes of Mutual Funds – Summary Findings 91
2.10 Minimum Required Corpus of Core SGF Based on Stress Testing Analysis at Clearing Corporations 93
2.11 Solvency Ratio of Life Insurance Sector 94
2.12 Solvency Ratio of Non-Life Insurance Sector 94
2.13 Contagion Losses due to Bank Failure 101
2.14 Contagion Losses due to NBFC Failure 102
2.15 Contagion Losses due to HFC Failure 102

Chapter III
3.1 Category of Complaints Received under the RB-IOS, 2021 119
3.2 Coverage of Deposits 120
3.3 Bank Group-wise Deposit Protection Coverage 120
3.4 Deposit Insurance Premium 121
3.5 Deposit Insurance Fund and Reserve Ratio 121
3.6 Corporate Insolvency Resolution Process 121
3.7 Sectoral Distribution of CIRPs 122
3.8 Outcome of CIRPs, Initiated Stakeholder-wise 122
 List of Select Abbreviations
3-MMA 3-Month Moving Average CCI Cyber Capability Index
AA Adjudicating Authority CCIL Clearing Corporation of India Limited
AD Assessable Deposit CCMP Cyber Crisis Management Plan
ADDV Average Daily Delivery Value CCPs Central Counterparties
AEs Advanced Economies CCs Clearing Corporations
AFS Available for Sale CDD Client Due Diligence
AI Artificial Intelligence CDs Certificates of Deposits
AID All Inclusive Direction CDS Credit Default Swaps
AIFs Alternative Investment Funds CDSL Central Depository Services Limited
AIFIs All India Financial Institutions CET1 Common Equity Tier 1
AMCs Asset Management Companies CFT Combating the Financing of Terrorism
AMFI Association of Mutual Funds in India CICRA Credit Information Companies
AML Anti Money Laundering (Regulation) Act, 2005
APY Atal Pension Yojana CICs Core Investment Companies
AR Authorised Representative CIs Credit Institutions
AUM Assets Under Management CIRP Corporate Insolvency Resolution
BBPS Bharat Bill Payment System Process

BCBS Basel Committee on Banking CIS Customer Information Sheet

Supervision CISO Chief Information Security Officer
BCP Business Continuity Plan CLOs Collateralised Loan Obligations
BE Budget Estimates CMIs Capital Market Intermediaries
BG Bank Guarantee CMs Clearing Members
BIFR Board for Industrial and Financial CoC Committee of Creditors
Reconstruction
CoR Certificate of Registration
BIS Bank for International Settlements
CP Commercial Paper
BoE Bank of England
CPI Consumer Price Index
BSDA Basic Services Demat Account
CPMI Committee on Payments and Market
BSI Banking Stability Indicator Infrastructures
CBOE Chicago Board Options Exchange CRAR Capital to Risk-Weighted Assets Ratio
CAD Current Account Deficit CRAs Credit Rating Agencies
CAF Common Application Form CSCRF Cybersecurity and Cyber Resilience
CAGR Compounded Annual Growth Rate Framework
CASA Current Account and Savings Account DC Disciplinary Committee
CBDCs Central Bank Digital Currencies DeFi Decentralised Finance
CBF Central Bank Funding DGA Duration Gap Analysis

i
Abbreviations

DGCI&S Directorate General of Commercial FSB Financial Stability Board

Intelligence & Statistics FSDC Financial Stability and Development
DICGC Deposit Insurance and Credit Council
Guarantee Corporation FSDC-SC Sub Committee of the Financial
DIF Deposit Insurance Fund Stability and Development Council
DLT Distributed Ledger Technology FSR Financial Stability Report
DMA Direct Market Access FSSI Financial System Stress Indicator
DPD Days Past Due FVTPL Fair Value Through Profit and Loss
DR Disaster Recovery FY Financial Year
DSR Debt Service Ratio F&O Futures and Options
EAR Earnings At Risk G20 Group of Twenty
EBIT Earnings Before Interest and Taxes GDP Gross Domestic Product
EBPT Earnings Before Profit and Tax GenAI Generative AI
ECB External Commercial Borrowings GFC Global Financial Crisis
EMDEs Emerging Markets and Developing GFD Gross Fiscal Deficit
Economies
GNPA Gross Non-Performing Asset
EMP Exchange Market Pressure
GSDP Gross State Domestic Product
EPS Earnings per Share
G-secs Government Securities
ERPs ESG Rating Providers
HFCs Housing Finance Companies
ESG Environmental, Social, and Governance
HFT Held for Trading
ESMA European Securities and Markets
Authority HQLAs High Quality Liquid Assets
EU European Union HTM Held-to-Maturity
EWS Early Warning Signals HUF Hindu Undivided Families
FAR Fully Accessible Route IBBI Insolvency and Bankruptcy Board of
FATF Financial Action Task Force India

FBs Foreign Banks IBUs IFSC Banking Units

FBIL Financial Benchmarks India Pvt. Limited ICR Interest Coverage Ratio
FCs Financial Creditors ID Insured Deposit
FCI Financial Conditions Index IFSC International Financial Services Centre
FDI Foreign Direct Investment IFSCA International Financial Services
Centres Authority
FDRs Fixed Deposit Receipts
IIBX India International Bullion Exchange
FIU-IND Financial Intelligence Unit - India
IIP International Investment Position
FMEs Fund Management Entities
FPI Foreign Portfolio Investment IMF International Monetary Fund

FRBM Fiscal Responsibility and Budget Ind-AS Indian Accounting Standards

Management INR Indian Rupee
FRED Federal Reserve Bank of St. Louis InvITs Infrastructure Investment Trusts
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 Financial Stability Report December 2024

IOSCO International Organization of Securities NAVs Net Asset Values

Commissions NaBFID National Bank for Financing
IPO Initial Public Offering Infrastructure and Development
IPs Insolvency Professionals NBFC Non-Banking Financial Company
IRF Impulse Response Function NBFC-ML Middle-layer NBFC
IRDAI Insurance Regulatory and Development NBFC-UL Upper-layer NBFC
Authority of India NBFI Non Banking Financial Intermediation
IRP Interim Resolution Professional NBSI Non Banking Stability Indicator
IU Information Utilities NCD Non-Convertible Debenture
JPY Japanese Yen NCLT National Company Law Tribunal
KRIs Key Risk Indicators NCMC National Common Mobility Card
KYC Know Your Customer NCRPS Non-Convertible Redeemable
Preference Shares
LCR Liquidity Coverage Ratio
NDTL Net Demand and Time Liabilities
LDMs Lead District Managers
NFC Non-Financial Company
LEAs Law Enforcement Agencies
NGFS Network for Greening the Financial
LEI Legal Entity Identifier System
LGD Loss Given Default NGOs Non-Government Organisations
LPCC Limited Purpose Clearing Corporation NHB National Housing Bank
LT Long-term NIC National Industrial Classification
MDG Modified Duration Gap NII Net Interest Income
MF Mutual Fund NIM Net Interest Margin
MFOS Mutual Fund Overnight Schemes NNPA Net Non-Performing Assets
MII Market Infrastructure Institutions NoC No-Objection Certificate

ML Machine Learning NOI Net Operating Income

MoU Memorandum of Understanding NPS National Pension System

NRIs Non-Resident Indians
MPS Minimum Public Shareholding
NSDL National Securities Depository Limited
MQSOS Median Quarter Sigma Order Size
NSFR Net Stable Funding Ratio
MRC Minimum Required Corpus
NSUCBs Non-Scheduled Urban Cooperative
MSCI-EMI Morgan Stanley Capital International- Banks
Emerging Markets Index
OCIs Overseas Citizens of India
MSF Marginal Standing Facility
OECD Organisation for Economic Co-
MTM Mark-To-Market operation and Development
MVE Market Value of Equity OIS Overnight Indexed Swap
MWPL Market Wide Position Limit OOI Other Operating Income
NABARD National Bank for Agriculture and Rural ORBIO Offices of the Reserve Bank of India
Development Ombudsman

iii
Abbreviations

OSS Off-Site Surveillance SAF Supervisory Action Framework

OTC Over-The-Counter SBs Stock Brokers
OTM Out-of-The-Money SCBs Scheduled Commercial Banks
PA Provisional Accounts SCN Show Cause Notice
PCA Prompt Corrective Action SD Standard Deviation
P/E Price-to-Earnings SDLs State Development Loans
PAT Profit After Tax SEBI Securities and Exchange Board of India
PCMs Professional Clearing Members SEs Supervised Entities
PCR Provisioning Coverage Ratio SEZ Special Economic Zone
PFRDA Pension Fund Regulatory and SFBs Small Finance Banks
Development Authority
SGrBs Sovereign Green Bonds
P&L Profit and Loss
SGF Settlement Guarantee Fund
PMS Portfolio Management Services
SIPs Systematic Investment Plans
PoPs Points of Presence
SLBCs State Level Banker’s Committees
PSBs Public Sector Banks
SLCCs State Level Coordination Committees
PSF Product Success Framework
SLR Statutory Liquidity Ratio
PSL Priority Sector Lending
SMAs Special Mention Accounts
PSOs Payment System Operators
SMEs Small and Medium Enterprises
PVBs Private Sector Banks
SROs Self Regulatory Organisations
QIPs Qualified Institutional Placements
SRS Systemic Risk Survey
RECO Revenue Expenditure to Capital Outlay
SUCBs Scheduled Urban Cooperative Banks
REITs Real Estate Investment Trusts
SWITS Single Window IT System
REER Real Effective Exchange Rate
TGA Traditional Gap Analysis
REs Regulated Entities
RFA Red Flagging of Accounts ToRs Terms of Reference

RI Resident Indian TR Trade Repository

RoA Return on Asset TRAI Telecom Regulatory Authority of India

RoD Record of Default UCB Urban Cooperative Bank

RoE Return on Equity UCC Unsolicited Commercial

Communications
RPs Resolution Plans
USCNBA Up Streaming Client Nodal Bank
RRBs Regional Rural Banks
Account
RSAs Rate-Sensitive Assets
VAR Vector Auto Regression
RSLs Rate-Sensitive Liabilities
VARX Vector Auto Regression with Exogenous
RVEs Registered Valuer Entities Variables
RVs Registered Valuers VIX Volatility Index
RWA Risk-Weighted Assets VRIN Valuation Report Identification
SA Sponsored Access Number

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 Financial Stability Report December 2024

Overview
The Financial Stability Report (FSR) is a half- Financial Institutions: Soundness and Resilience
yearly publication, with contributions from all
The soundness of scheduled commercial banks
financial sector regulators. It presents the collective
(SCBs)1 has been bolstered by strong profitability,
assessment of the Sub Committee of the Financial
lower non-performing assets and adequate capital
Stability and Development Council on current and
and liquidity buffers. Return on assets (RoA) and
emerging risks to the stability of the Indian financial
return on equity (RoE) are at decadal highs, while
system.
gross non-performing assets (GNPA) ratio has fallen
Global Macrofinancial Risks to a multi-year low.

The global economy and the financial system Macro stress tests, which are not forecasts and
remain resilient despite heightened uncertainty. are based on adverse hypothetical scenarios,
Normalisation of monetary policy is underway and demonstrate that most SCBs have adequate capital
financial conditions remain accommodative. While buffers relative to the regulatory minimum even
near-term risks have receded, vulnerabilities such under adverse stress scenarios. Stress tests of
as stretched asset valuations, high public debt, mutual funds and clearing corporations also attest
prolonged geopolitical conflicts and risks from to the resilience of these segments.
emerging technologies pose threats to financial
The CRAR of urban co-operative banks (UCBs) has
stability in the medium term. Emerging market
remained robust in September 2024, while that of
economies (EMEs) face challenges in preserving
non-banking financial companies (NBFCs) is well
financial stability from global spillovers and growing
above the prescribed regulatory minimum. The
uncertainty regarding trade policies and logistics
consolidated solvency ratio of the insurance sector
disruptions.
also remains above the minimum threshold limit.
Domestic Macrofinancial Risks
Network analysis indicates that the total outstanding
Against an uncertain global backdrop, the Indian bilateral exposures between financial institutions
economy is exhibiting steady growth, underpinned are expanding, with SCBs holding the largest share.
by solid macroeconomic fundamentals and strong A simulated contagion analysis, however, shows that
domestic growth drivers. The domestic financial losses due to failure of five banks with the maximum
system is demonstrating resilience, supported by capacity to cause contagion would not lead to failure
healthy balance sheets of banks and non-banks, and of any additional bank.
fortified by strong capital buffers, robust earnings
Regulatory Initiatives and Other Developments in
and improving asset quality. Vulnerabilities in
the Financial Sector
the form of stretched equity valuations, pockets
of stress in the microfinance and consumer credit Global regulatory efforts remain focused on
segments and risks from external spillovers require strengthening the stability of the financial system,
close monitoring. identifying and mitigating potential vulnerabilities,

1
Excluding Small Finance Banks.

1
Overview

fostering collaboration and improving adaptability. Assessment of Systemic Risk

Recent initiatives have concentrated on mitigating
In the latest round of the systemic risk survey
risks arising from technological advancements, (SRS) carried out in November 2024, respondents
cyber security threats and third-party dependencies. categorised all major risk groups in the ‘medium’
Addressing vulnerabilities in non-bank financial risk category. Majority of respondents expressed
intermediaries and cross-border payment systems confidence in domestic financial system stability
remain priorities. and assessed geopolitical conflicts, evolution of
global growth and inflation, and capital outflows/
Domestic regulatory initiatives continue to focus on
rupee depreciation as major near-term risks. Nearly
reinforcing the safety and resilience of the financial 95 per cent of the respondents perceived ‘medium’
system. Efforts have been focused on strengthening to ‘limited’ near-term impact of global spillovers
the resilience of financial intermediaries and market on domestic financial stability. 60 per cent of the
infrastructure, with emphasis on cyber resilience, respondents assessed better or similar prospects for
fraud prevention and customer protection. the Indian banking sector over a one-year horizon.

2
 Financial Stability Report December 2024

Chapter I
Macrofinancial Risks

The global financial system displayed continued resilience amidst moderation in economic activity, rising policy
uncertainty and elevated geopolitical tensions. Major vulnerabilities, such as elevated and rising public debt and
stretched asset valuations, however, remain. Spells of high volatility in the global financial markets suggest continued
uncertainty on future growth prospects.
The Indian economy and the financial system remain strong and stable underpinned by sound macroeconomic
fundamentals, healthy balance sheets of banks and non-banks and low volatility in financial markets despite some
qualms about global spillovers.

Introduction resilience during this period of significant

shifts. With financial conditions remaining
1.1 Since the June 2024 issue of the Financial
accommodative, vulnerabilities are festering in
Stability Report (FSR), receding inflation has
the form of leveraged positions, stretched asset
enabled a broadening of the pivot towards easing
valuations, elevated levels of public and private
monetary policy, barring a few outliers. So far, global
debt and opaque fragilities in less regulated non-
economic activity and trade have remained resilient
bank financial intermediaries. Global banking
to the widening of geopolitical conflicts. Global
sector asset quality concerns due to stress in select
financial markets remain on the edge and are prone
segments such as credit cards and commercial real
to sudden bouts of volatility as policy uncertainty,
estate linger.
including that from political spillovers, remains
elevated. Vulnerability to abrupt and sharp price 1.2 As per its latest assessment, the
actions has consequently increased, as witnessed International Monetary Fund (IMF) projects
during the August 2024 episode of market turmoil global growth at 3.2 per cent in 2024 and 2025
involving Japanese Yen (JPY) carry trade unwinding. (Chart 1.1 a), with emerging markets and developing
The global financial system has generally displayed economies (EMDEs) growing at a steady pace,

Chart 1.1: Global Growth Projections

Note: * Forecasts.
Sources: IMF and World Bank.

3
Chapter I Macrofinancial Risks

Chart 1.2: Policy Rate and Inflation

Note: (1) * Based on policy actions of 8 advanced economy central banks and 20 emerging market central banks. Positive figure denotes rate hike action and negative figure
denotes rate cut action in respective quarters. Data available as on December 12, 2024.
(2) # PCE Index used for US and CPI Index used for other countries. Data available as on December 12, 2024.
Source: Bloomberg.

advanced economies (AEs) reverting or approaching 1.4 In this uncertain global macroeconomic
potential growth, and low-income economies facing and financial environment, the Indian economy
downside risks. The World Bank, on the other hand, is exhibiting resilience and stability. Real gross
projects global growth at 2.6 per cent and 2.7 per
domestic product (GDP) is projected to grow at
cent in 2024 and 2025, respectively (Chart 1.1 b).
6.6 per cent in 2024-25 aided by revival in rural
1.3 While disinflation has progressed without consumption, pickup in government consumption
significant wage pressures in spite of strong labour and investment and strong services exports. The
markets and stubborn services prices, upside risks
underlying growth momentum remains strong and
to inflation from further escalation in geopolitical
is supported by the steadfast focus of monetary
conflicts and growing economic fragmentation
policy on a durable alignment of inflation to the
persist, with commodity prices and supply shocks
target. A stable financial system, bolstered by
as conduits. Moreover, expansionary fiscal policies
could negate the hard-earned gains in fighting healthy balance sheets and profitability of banks
higher inflation. Consequently, central banks and non-banks and reasonable expansion in credit,
remain cautious about a premature easing of is providing support to businesses and households
monetary policy stance (Chart 1.2 a and b). (Chart 1.3).

4
 Financial Stability Report December 2024

Chart 1.3: Banking Sector Soundness Indicators

Notes: (1) Data as on December 12, 2024.

(2) Data pertains to domestic operations of SCBs (excluding SFBs).
Sources: RBI supervisory returns and staff calculations.

I.1 Global Backdrop vulnerabilities, any abrupt tightening in financial

conditions, when economic uncertainty is elevated,
I.1.1 Macrofinancial Development and Outlook
could heighten near-term risks (Chart 1.4).
1.5 Global growth remains steady, with the
balance of risks to outlook tilted to the downside.
Strong growth in the U.S. and stable outlook in Chart 1.4: Downside Risks to Global Growth Outlook

EMDEs are positives for the world economy.

Moreover, the global battle against inflation is
winding down without the risk of recession. With
stronger recovery in public investment in AEs
and structural reforms in EMDEs, growth could
accelerate. Downside risks, such as escalating
geopolitical tensions, uncertainty about trade
and industrial policies in the aftermath of major
global elections, and potential tightening of
financial conditions, however, could drag global
output lower from baseline projections1. From Note: Results are shown as deviation from baseline projections.
a financial stability standpoint, while downside Source: IMF.

risks to economic growth could raise medium-term

1
International Monetary Fund (2024), “World Economic Outlook: Policy Pivot, Rising Threats”, October.

5
Chapter I Macrofinancial Risks

Chart 1.5: Financial Conditions

Note: Value for Global Financial Conditions Index (FCI) is derived by subtracting 100 from Goldman Sachs Global FCI. Advanced economy (AE) FCI is derived as the first
principal component of US, UK and Eurozone FCIs. Individual FCIs provided by Bloomberg have been multiplied by (-1).
Sources: Bloomberg, FRED (Federal Reserve Bank of St. Louis), Goldman Sachs and RBI staff calculations.

1.6 Financial market conditions, as reflected 1.9 Overall, even as near-term risks remain
in summary indices, are moving in alignment contained, medium-term vulnerabilities and
with policy shifts. Monetary easing is, however, the growing influence of new technologies in
coinciding with accommodative financial the financial sector, in addition to the potential
conditions, which could fuel irrational exuberance financial stability consequences of climate and
among market participants and amplify any shock, cyber risks, require close monitoring.
through nonlinear reactions and fire sales (Chart
1.5 a and b).
Chart 1.6: Uncertainty and Volatility
1.7 There is a widening disconnect between
uncertainty and financial market volatility, with
potential macrofinancial implications (Chart 1.6).
According to the IMF, one-year-ahead global real
GDP growth could worsen by 1.2 percentage points
if global real economic uncertainty reaches levels
seen during the global financial crisis in 20082.
1.8 Low volatility may be engendering
inaccurate assessments of risks in asset prices.
Concentrated, interconnected, complex and opaque
exposures in the financial system can amplify
Note: (1) All series are 12 month moving averages of differences in z-scores from
sudden shift in sentiments and trigger sell-offs 2012 to 2024.
(2) Economic uncertainty is the index of Baker, Bloom and Davis (2016);
and snap backs as witnessed in the market turmoil Geopolitical Risk is the index of Caldara and Iacoviello (2022); Financial
volatility is average of CBOE VIX, JPM FX volatility index, and volatility
involving deleveraging of Yen carry trades in August in high yield corporate bond index.
Sources: Bloomberg and RBI staff calculations.
2024 and worldwide sell-offs.
2
International Monetary Fund (2024), “Global Financial Stability Report: Steadying the Course: Uncertainty, Artificial Intelligence, and Financial
Stability”. October.

6
 Financial Stability Report December 2024

I.1.2 Global Macrofinancial Risks estimates of unidentified debt5 range between 1.0
1.10 Several other vulnerabilities foreshadow and 1.5 per cent of GDP on an average6.
global financial stability. This section focuses on 1.12 High levels of debt, the associated interest
the following vulnerabilities that require closer burden and potential debt-at-risk7 prompt concerns
monitoring: high and rising levels of public debt; about debt sustainability endangering financial
asset valuations and volatility; and the impact of stability amidst structural changes such as ageing
artificial intelligence on financial stability. populations and healthcare needs, green transition
A. High and Rising Levels of Public Debt and climate adaptation, and defence spending in
the midst of elevated geopolitical tensions (Chart
1.11 Global public debt is projected to exceed
1.8 a and b). Fiscal risk premia could rise sharply as
US$ 100 trillion (i.e., 93 per cent of global GDP) by
a result, leading to a spike in the cost of government
the end of 2024. The world’s two largest economies
debt and instability in government bond markets
(viz., the U.S. and China) are the main drivers of
as witnessed in the September 2022 turmoil in the
this surge which is expected to surpass 100 per cent
UK.
of GDP by 20303 (Chart 1.7 a). Future debt levels
could exceed these projections4, given that actual 1.13 Fiscal sustainability influences sovereign
debt-to-GDP ratios turned out to be higher than ratings. Among G-20 economies, there have been
forecasts in the past (Chart 1.7 b). In addition, the more downgrades than upgrades (Table 1.1).

Chart 1.7: Public Debt-to-GDP Ratio and Forecast Errors

Note: *Forecast errors are defined as the projected debt-to-GDP ratio relative to the realised outcome for each country. The bars show the interquartile range for the three-
year horizon.
Source: IMF.

3
International Monetary Fund (2024), “Fiscal Monitor: Putting a Lid on Public Debt”, October.
4
International Monetary Fund (2024), “Fiscal Monitor: Putting a Lid on Public Debt”, October.
5
Unidentified debt consists of: materialisation of contingent liabilities and fiscal risks. These liabilities and risks stem largely from losses of state-
owned enterprises as well as from bank recapitalisations and loan guarantees typically implemented during banking crises and periods of financial
stress; Other important sources include arrears, recognition of debt from institutional changes in the perimeter of government, and extrabudgetary
spending.
6
International Monetary Fund (2024), “Fiscal Monitor: Putting a Lid on Public Debt”, October.
7
Debt-at-risk is the level of future debt in an extremely adverse scenario.

7
Chapter I Macrofinancial Risks

Chart 1.8: Public Debt and Interest Burden

Note: Arrow represents change between 2019 and 2023.

Source: UNCTAD.

Table 1.1: Sovereign Rating of G20 Economies

1.14 EMDEs that have a greater share of foreign-
2019 2024
Country currency denominated debt remain vulnerable
Moody’s S&P Fitch Moody’s S&P Fitch
to potential default. Empirical analysis shows
Australia Aaa AAA AAA Aaa AAA AAA
Argentina Caa2 CC CC Ca CCC CCC that prior to defaulting on foreign currency debt,
Brazil Ba2 BB- BB- Ba1 BB BB sovereigns typically spent about 20 per cent of
Canada Aaa AAA AAA Aaa AAA AA+ general government revenues on interest payments.
China A1 A+ A+ A1 A+ A+
Moreover, during the three years prior to default,
France Aa2 AA AA Aa3 AA- AA-
their net foreign investment positions weakened by
Germany Aaa AAA AAA Aaa AAA AAA
India Baa2 BBB- BBB- Baa3 BBB- BBB-
an average of 30 percentage points to 106 per cent
Indonesia Baa2 BBB BBB Baa2 BBB BBB of GDP, often in tandem with depreciating domestic
Italy Baa3 BBB BBB Baa3 BBB BBB currencies8 (Chart 1.9 a and b).
Japan A1 A+ A A1 A+ A
1.15 Banks’ exposure to their own governments
Mexico A3 BBB+ BBB Baa2 BBB BBB-
Saudi Arabia A1 A- A Aa3 A A+
has grown in many EMDEs since the end of 2019.
South Africa Baa3 BB BB+ Ba2 BB- BB- This has deepened the “sovereign-bank nexus” and
South Korea Aa2 AA AA- Aa2 AA AA- therefore, shocks between sovereigns and banks
Türkiye B1 B+ BB- B1 BB- BB- may spread more quickly. A sharp rise in sovereign
United Kingdom Aa2 AA AA Aa3 AA AA-
bond yields could impact bank capital by reducing
United States Aaa AA+ AAA Aaa AA+ AA+
the value of government securities held by them
No ratings change from 2019
Ratings downgrade from 2019 as well as expose them to funding risk in money
Ratings upgrade from 2019 markets due to depletion in the value of collateral
Note: Russia is not included here as its ratings for 2023 and 2024 are used for borrowing. On the other hand, since
not available.
Source: Bloomberg. governments often support banking sector in times

8
S&P Global (2024), “The Early Warning Signs of Sovereign Foreign Currency Defaults”, October.

8
 Financial Stability Report December 2024

Chart 1.9: Debt Vulnerabilities in EMDEs

Note: Share of foreign currency denominated debt in total government debt is based on latest data available for 25 EMDEs.
Sources: UNCTAD, Federal Reserve Economic Data and World Bank.

of stress to prevent bank runs, any reduction in Magnificent 7, a group of technology stocks, now
this capacity due to limited fiscal headroom could forms 31 per cent of the S&P 500 Index, up from 25
exacerbate stress and affect banks’ ability to provide per cent at the beginning of 2024. To justify current
credit to the real sector. valuations and for P/E ratios to return to their
B. Asset Valuations and Volatility historical 10-year average, earnings per share must
grow at compounded annual growth rates (CAGR)
1.16 Since the June 2024 FSR, global equity
between 10 and 30 per cent over the next two years
markets have rallied, fuelled by expectations of soft
(Chart 1.10 a and b).
landing and lower interest rates. This has stretched
equity valuations, with many stock indices trading 1.17 Corporate bond market valuations also
at high price-to-earnings (P/E) ratios relative to remain high, with credit spreads (viz., the yield
historical levels. Moreover, in the U.S., the so-called difference between corporate bonds and similar-

Chart 1.10: Equity Market Performance and Valuation

Sources: Bloomberg and RBI staff calculations.

9
Chapter I Macrofinancial Risks

Chart 1.11: Credit Spreads and Government Bond Yields

Source: Bloomberg.

maturity government bonds) narrowing to low global financial markets saw an unwind of leveraged
levels relative to historical distributions. Despite carry trades, which were primarily funded using the
monetary policy easing, sovereign bond yields have JPY (Chart 1.12 a and b).
hardened in major economies on market expectation
1.19 The ensuing decline in stock prices,
of policy shifts on tariffs and geopolitical conditions
widening of corporate bond spreads and spike
(Chart 1.11 a and b).
in volatility exemplified the outsized market
1.18 High equity valuations and low credit reaction to unexpected developments. The Chicago
spreads could be a source of vulnerability to financial Board Options Exchange (CBOE) Volatility Index
stability, especially when market expectations turn (VIX)9, which is often referred to as a fear gauge
volatile as in the first week of August 2024, when in financial markets, saw its largest one-day spike

Chart 1.12: Carry Trade and Volatility

Source: Bloomberg.

9
The VIX is constructed from the market prices of out-of-the-money (OTM) puts and calls written on the S&P500 Index.

10
 Financial Stability Report December 2024

Chart 1.13: Movement of Major Currencies against the US Dollar 1.20 Crypto-assets’ prices swung wildly and the
during August 1-5, 2024
rally, which faded during March-September 2024,
was boosted subsequently, especially after the US
election outcome (Chart 1.14 a). Bitcoin, the most
prominent of them, more than doubled during this
calendar year and hit a record high of US$ 108,316
on December 17, 2024. This has also fuelled market
capitalisation of stablecoins (Chart 1.14 b), which
are primarily used to enable lending, borrowing
and trading of other digital assets and support the
crypto ecosystem.
1.21 Widespread usage of crypto-assets and
Source: Bloomberg.
stablecoins has consequences for macroeconomic
and financial stability. As highlighted in the IMF-FSB
ever on August 5, 2024, surpassing peaks witnessed synthesis paper11, it could reduce the effectiveness
around the GFC and the onset of the pandemic in of monetary policy, worsen fiscal risks, circumvent
March 2020. According to the Bank for International capital flow management measures, divert
Settlements (BIS), roughly US$ 250 billion of these resources available for financing the real economy
carry trades were unwound, though their exact size and threaten global financial stability. Even though
is difficult to estimate as they can be implemented the size of crypto-asset markets remains small, their
through various on- and off-balance sheet positions10. continued growth and increasing linkages with the
The impact of the carry trade unwinding was felt on traditional financial system could pose systemic
many currencies (Chart 1.13). risks. Stablecoins also present potential run risks.

Chart 1.14: Crypto-assets and Stablecoins

Source: Bloomberg.

10
Aquilina, Matteo, Lombardi, Marco, Schrimpf, Andreas and Sushko, Vladyslav (2024), “The market turbulence and carry trade unwind of August
2024”, BIS Bulletin No 90, August.
11
IMF-FSB (2023), “IMF-FSB Synthesis Paper: Policies for Crypto-Assets”, September.

11
Chapter I Macrofinancial Risks

1.22 Another new and rapidly growing financial 1.24 Constantly evolving AI technology offers
innovation is tokenisation, which refers to the benefits to financial firms through its ability to
process of creating digital representations - known as process large and unstructured data, scalability, and
tokens - of real-world assets using technologies such adaptability, which could result in efficiency gains
as distributed ledger technology (DLT). Tokenisation and cost savings in many areas such as quantitative
of financial assets – bank deposits, money market analysis, risk management, operational processes,
funds’ shares, repos, and government securities – is customer interaction and cyber security. Alongside
rising. Given that it is still in its infancy, financial these benefits, they are also prone to increased
stability concerns of tokenisation of assets are
risks in terms of bias and hallucination16, misuse,
currently limited. Nonetheless, it has the potential
overreliance on common models, faulty predictions,
to deepen the interconnectedness between the
data quality issues, and third-party dependence17.
traditional financial system and the decentralised
Model risk would be a major hazard for financial
financial (DeFi) system, including the crypto-assets
firms that use AI tools. A key challenge with AI models
ecosystem12, and cause spillovers to broader financial
is their lack of explainability or the so-called ‘black
system. DLT-based tokenisation can expose several
box problem’ due to the difficulty in explaining how
financial stability vulnerabilities, including liquidity
these complex models are making decisions even as
and maturity mismatches, leverage, asset price
and quality, interconnectedness, and operational they achieve more accurate predictions18. Since AI
fragilities13. depends heavily on the data that it is trained on,
the inability to explain how these systems work
C. Impact of Artificial Intelligence
could result in models using biased or less related
1.23 Artificial intelligence (AI) is rapidly changing data. These issues are particularly pertinent in the
many aspects of human life. The emergence of financial sector, especially in the banking industry,
generative AI has significant implications for the in which adoption of AI is rapidly growing (Chart
financial system. Financial institutions have long 1.15 a and b).
employed various forms of AI such as rule-based
models and machine learning (ML). The advent 1.25 The evolution and adoption of AI
of generative AI models, however, would be poses several risks to financial stability. First,
transformative as they have unique features that interconnectedness could become enhanced
can adapt and learn independently and at speed14, through overreliance on shared technology, service
produce a range of responses in many formats rather providers and infrastructure. In particular, there
than being restricted to a specific set of possible is a high risk of market concentration both within
responses, and in some use cases match or exceed the financial industry as well as critical third-
human capabilities15. party service providers of cloud and AI services

12
International Monetary Fund (2024), “Global Financial Stability Report: Steadying the Course: Uncertainty, Artificial Intelligence, and Financial
Stability”, October.
13
Financial Stability Board (2024): “The Financial Stability Implications of Tokenisation”, October.
14
Breeden, Sarah (2024), “Engaging with the machine: AI and financial stability”, Bank of England, October.
15
Liang, Nellie (2024), “Remarks on Artificial Intelligence in Finance”, Financial Stability Board, June.
16
Hallucination refers to presenting false or misleading information as facts.
17
European Central Bank (2024), “Financial Stability Review - The rise of artificial intelligence: benefits and risks for financial stability”, May.
18
Araujo, Douglas, Doerr, Sebastian, Gambacorta, Leonardo, Tissot, Bruno (2024), “Artificial intelligence in central banking”, BIS Bulletin No 84, January.

12
 Financial Stability Report December 2024

Chart 1.15: Global Spending on Artificial Intelligence

Note: * Forecasts from 2024 to 2027.

Sources: IMF, IDC and Statista.

(Chart 1.16 a). Second, the threat of cyber risk increased market speed and volatility under stress,
turning into a financial stability risk is high as AI especially when trading strategies using AI become
could aid cyber attackers through sophisticated highly correlated. Specifically, if such trades are
phishing attacks such as creation of deepfakes funded through leverage, any shock could amplify
using generative AI. With widespread availability market stress through fire sales and feedback loops.
of AI services such as ChatGPT, there has been a Moreover, AI may encourage migration of more
growing concern that these services are being used activities to NBFIs, increasing systemic opacity19.
for cyberattacks (Chart 1.16 b). Third, according Fourth, if technological penetration and market
to the IMF, the increased adoption of AI in capital and vendor concentration are high, transition of
markets can create additional risks related to risk from individual firms to the financial system

Chart 1.16: Market Concentration and Cyber Attacks

Note: (1) * Includes platform as a service, infrastructure as a service and hosted private cloud services
(2) # Index represents 12-month moving average of search interest relative to the highest point since 2004 for worldwide google search of ‘AI’, ‘Cyber attack’ and
‘Cyber attack and AI’. Data accessed on December 12, 2024.
Sources: Statista, Synergy Research Group and Google Trends.

19
International Monetary Fund (2024), “Global Financial Stability Report - Steadying the Course: Uncertainty, Artificial Intelligence, and Financial
Stability”, October.

13
Chapter I Macrofinancial Risks

could be nonlinear and portend systemic risk20. Chart 1.18: Inflation

Standard setting bodies and national regulators

and supervisors should, therefore, take a balanced
approach to reap the benefits of AI while safeguarding
the financial system. They must update their
skills and tools as well as proactively adapt their
frameworks to identify and mitigate emerging risks
from this rapidly evolving technology.
I.2 Domestic Macrofinancial Risks
1.26 India remains the fastest growing major
economy of the world, with strong investment
and public consumption underpinning economic Sources: National Statistical Office (NSO) and RBI staff calculations.
performance21. The domestic financial system is
fortified by healthy balance sheets of banks and 1.28 On the downside, the softness in industrial
non-banking financial companies (NBFCs), and activity, especially in the manufacturing sector,
relatively low volatility in financial markets. moderation in urban demand, global spillovers and
I.2.1 Domestic Growth and Inflation protective trade and industrial policies pose risks to
the outlook.
1.27 During H1:2024-25, real GDP growth (y-o-y)
moderated to 6.0 per cent from 8.2 per cent and 8.1 1.29 After its descent to sub-target levels in
per cent growth recorded during H1 and H2 of 2023- July and August 2024, consumer price index (CPI)
24, respectively. Despite this recent deceleration, inflation changed course on the back of a rise in food
structural growth drivers remain intact. Real GDP prices and rose beyond the upper tolerance level to
growth is expected to recover in Q3 and Q4 of 2024- 6.2 per cent in October 2024. Subsequently, with
25 supported by pick up in domestic drivers, mainly some softening of food prices and favourable base
public consumption and investment, strong service effect, CPI inflation came down to 5.5 per cent in
exports and easy financial conditions (Chart 1.17). November 2024. Meanwhile, core CPI inflation (i.e.,
Chart 1.17: GDP Growth and Weighted Contribution of CPI excluding food and fuel) rose by 64 basis points
Components (bps) since May 2024 to 3.7 per cent in November
2024 (Chart 1.18).
1.30 Going forward, the disinflationary effect of
a bumper kharif harvest and the rabi crop prospects
are expected to soften prices of foodgrains. On the
flipside, the rising frequency of extreme weather
events (e.g., heat waves and unseasonal rains)
continue to pose risks for food inflation dynamics.
Persisting geopolitical conflicts and geo-economic
fragmentation can also impose upside pressures on
global supply chain and commodity prices (Chart
Sources: National Statistical Office (NSO) and RBI staff calculations.
1.19 a and b).

20
European Central Bank (2024), “Financial Stability Review - The rise of artificial intelligence: benefits and risks for financial stability”, May.
21
International Monetary Fund (2024), “Regional Economic Outlook: Asia and Pacific - Resilient Growth but Higher Risks”, November.

14
 Financial Stability Report December 2024

Chart 1.19: Uncertainties in Global Trade

Sources: Refinitiv, IMF Port Watch, Caldara and Iacoviello (2022) and Caldara, Iacoviello, Molligo, Prestipino and Raffo (2020).

I.2.2 External Sector this period from US$ 171.0 billion a year ago. With
1.31 Merchandise exports recorded growth of the sustained buoyancy in services exports and
2.2 per cent (y-o-y) during April-November 2024, remittances, widening of the merchandise trade
whereas merchandise imports rose by 8.3 per deficit was partly offset, resulting in a current
cent, led by demand for gold, petroleum, crude account deficit of 1.2 per cent of GDP in H1:2024-
and products, and electronic goods. Accordingly, 25 (Chart 1.20 a, b, c and d).
trade deficit increased to US$ 202.4 billion during
Chart 1.20: Trade Deficit, Service Exports and Private Transfers

Sources: Directorate General of Commercial Intelligence & Statistics (DGCI&S) and RBI.

15
Chapter I Macrofinancial Risks

1.32 In the financial account, net foreign direct Chart 1.21: Balance of Payments

investment (FDI) inflows moderated y-o-y, while

strong foreign portfolio investment (FPI) inflows in
the first half of 2024-25 were offset by large outflows
subsequently. Overall, net FPI inflow stood at US$
12.7 billion during 2024-25 so far (up to December
12, 2024), with net debt flows benefiting from
India’s inclusion in multiple global bond indices.
Both external commercial borrowings (ECBs) and
non-resident deposit inflows were higher than a
year ago (Table 1.2). Overall, capital flows exceeded
the current account deficit (CAD) and contributed to
Note: ‘Others’ includes external assistance, rupee debt service, other capital and
accretion to foreign exchange reserves (Chart 1.21). errors and omissions.
Source: RBI.
As on December 20, 2024, India’s foreign exchange
reserves of US$ 644.4 billion are the fourth largest Table 1.3: Hedging Status of ECB Loans - September 2024
in the world. Description
Amount
(US$ million)
1.33 Indicators of external sector sustainability A. ECB – Total outstanding 1,90,397
showed improvement: foreign exchange reserves B. ECB – INR denominated 15,332
C. ECB – FDI Companies’ borrowings from foreign
covered 99 per cent of the country’s external debt parent
32,474

or nearly one year of merchandise imports as at of which:

(a) INR denominated 12,357
end-September 2024. Moreover, around two-thirds
(b) FCY denominated 20,117
of ECBs remain hedged (Table 1.3). Other metrics, D. ECB – Non-Rupee and non-FDI [= A-B-C(b)] 1,54,948
such as external debt to GDP, short-term debt22 of which:
(a) Public sector companies 57,365
to total external debt and the net international
(b) Private companies and others 97,583
investment position (IIP) also indicated external E. Hedging details of non-Rupee non-FDI ECBs (i.e., D
above)
sector resilience (Chart 1.22).
1. Hedging declared on registration from
67,381
April 2019
Table 1.2: Capital Flows (US$ billion)
of which:
Financial Year so far Financial Year (a) Public sector companies 11,879
Component (b) Private companies and others 55,502
Period 2024-25 2023-24 2023-24 2022-23
2. Other past loans reported hedged by borrowers 22,079
April-
FDI (net) 2.1 7.7 10.1 28.0 of which:
October
(c) Public sector companies 11,131
April- (d) Private companies and others 10,948
FPI (net) 12.7 26.0 44.6 -4.8
December
F. ECB – unhedged {D-(E1+E2)} 65,488
April- G. Percentage share of unhedged ECB {(F)/(A)*100} 34.4
ECB (net) 9.2 2.8 3.6 -4.1
October Memo Item:
Non-resident April- Natural Hedge Under Item F 2,905
11.9 6.1 14.7 9.0
Deposits (net) October
G# Percentage share of unhedged ECB {(F-Memo Item)/
32.9
Note: Data on FPI to India for financial year so far (December 12, (A)*100}
2024) and corresponding period previous year have been sourced from
Note: (1) # After adjusting for natural hedge.
NSDL, whereas data for 2023-24 and 2022-23 are based on balance of
(2) Many of the loans under items (C) and (E) also have natural
payments (BoP) statistics. ECB (net) comprises external commercial
hedge
borrowings to India.
Source: RBI.
Sources: RBI and NSDL.

22
With original maturity of up to one year.

16
 Financial Stability Report December 2024

Chart 1.22: External Vulnerability Indicators Chart 1.23: Sales Growth of Listed Private NFCs

Note: *Original Maturity; P: Provisional; PR: Partially Revised. Note: Based on 2,839 listed private non-financial companies in H1:2024-25.
Sources: RBI and Ministry of Finance. Sources: Capitaline and RBI staff calculations.

I.2.3 Corporate Sector As a result, operating profit margin moderated

1.34 The overall performance of listed private on sequential basis. Within the services sector,
non-financial companies (NFCs) has remained steady operating profit margins moderated during H1:2024-
this year so far: sales growth (y-o-y) remained stable 25 for both IT and non-IT services companies,
at 6.2 per cent in H1:2024-25 same as in H2:2023-24. however, they continued to remain at elevated level
Sales growth of manufacturing companies remained (Chart 1.24 a and b).
unchanged at 4.9 per cent during H1:2024-25, while 1.36 The average cost of finance for listed private
for IT and non-IT services sectors, sales rose by 5.7 non-financial companies, as measured by the ratio
per cent and 9.6 per cent, respectively (Chart 1.23). of interest expenses to average of total borrowings
1.35 With rising staff and input costs, operating from all sources, has risen since March 2022 to 9.2
profit growth (y-o-y) of manufacturing companies per cent in September 2024. The distribution of
moderated to 4.3 per cent during H1:2024-25. companies and their borrowings according to the

Chart 1.24: Profitability Trend (Growth and Margins) - Listed Private NFCs

Note: Based on 2,839 listed private non-financial companies in H1:2024-25.

Sources: Capitaline and RBI staff calculations.

17
Chapter I Macrofinancial Risks

Chart 1.25: Financing of Listed Private Non-Financial Companies

Note: Based on half-yearly balance sheets of 3,618 listed private non-financial companies in H1:2024-25.
Sources: Capitaline and RBI staff calculations.

cost of finance indicates a shift to higher interest NFCs’ debt serviceability23 improved during
rate buckets among companies as well as in their H1:2024-25 in all major sectors (Chart 1.26 a). Their
borrowing profiles (Chart 1.25 a, b and c). debt service ratios24 remain below average for the
period 2007-2024 (Chart 1.26 b).
1.37 With lower rise in interest cost relative to
earnings before interest and taxes, listed private

Chart 1.26: Debt Serviceability of NFCs

Note: * Based on 2,839 listed private non-financial companies in H1:2024-25.

Sources: Capitaline, BIS and RBI staff calculations

23
Debt serviceability, as measured by interest coverage ratio (ICR), is defined as the ratio of earnings before interest and taxes (EBIT) to interest
expenses.
24
The debt service ratio (DSR) is defined as the ratio of interest payments plus amortisations to income. As such, the DSR provides a flow-to-flow
comparison – the flow of debt service payments divided by the flow of income and as such reflects the share of income used to service debt.

18
 Financial Stability Report December 2024

Chart 1.27: NFCs – Debt-to-Equity and Debt-to-GDP Ratios

Note: * Data as on June 30, 2024

Sources: CMIE and BIS.

1.38 At a broader level, the debt-to-equity ratio to broad-based growth in revenue receipts. During
of NFCs has been steadily declining since 2018-19. April-October 2024, the GFD stood at 46.5 per cent
India’s corporate debt-to-GDP ratio remains low of BE vis-à-vis 45.0 per cent in the corresponding
when compared with that of AE and EME peers period last year. Other major deficit indicators
(Chart 1.27 a and b). (viz., gross primary deficit and revenue deficit) are
budgeted to record an improvement during 2024-25
I.2.4 Government Finance
(Table 1.4).
1.39 In the post-pandemic period, India’s public
1.40 The focus on capital expenditure to support
finances have been underpinned by a steadfast
investment and economic growth has resulted
commitment to fiscal consolidation. As per the
in a consistent improvement in the quality of
provisional accounts (PA) of the central government
expenditure (Chart 1.28). Capital outlay (i.e., capital
for 2023-24, the gross fiscal deficit (GFD) was
expenditure excluding loans and advances) is
contained at 5.6 per cent (of GDP at current market
prices), lower than the budget estimates (BE) of 5.9 Chart 1.28: Quality of Expenditure – Central Government
per cent. It is projected to go down further to 4.9 per
cent in 2024-25 (BE). This improvement in the fiscal
position of the central government is primarily due

Table 1.4: Central Government Finances - Key Deficit Indicators

(Per cent of GDP)

Items 2020-21 2021-22 2022-23 2023-24 2024-25

(PA) (BE)
1. Fiscal Deficit 9.2 6.7 6.4 5.6 4.9
2. Revenue Deficit 7.3 4.4 4.0 2.6 1.8
3. Gross Primary 5.7 3.3 3.0 2.0 1.4
Deficit
Note: PA - Provisional Accounts; BE - Budget Estimates. Note: PA- Provisional Accounts; BE- Budget Estimates; RD – Revenue Deficit;
Sources: Controller General of Accounts (CGA) and Union budget GFD – Gross Fiscal Deficit.
documents. Sources: CGA; and Union budget documents.

19
Chapter I Macrofinancial Risks

Chart 1.29: Debt Sustainability – Central Government

Note: RE: Revised Estimates; BE: Budget Estimates.

Sources: Union budget documents, IMF and RBI staff estimates.

projected to increase by 16.7 per cent during 2024- Improving debt dynamics alongside a favourable
25 (BE), taking its share in borrowings to 56.9 per interest rate-growth rate differential (r-g) augurs
cent. Revenue expenditure is estimated to record a well for fiscal sustainability (Chart 1.29 a, b and c).
relatively modest rise of 6.2 per cent. As a result, the 1.43 States’ consolidated GFD stood at 2.9 per cent
revenue expenditure to capital outlay ratio (RECO) of GDP in 2023-24 (PA), which was well within the
is projected to fall to an all-time low of 4.0 during Centre’s prescribed limit of 3.5 per cent. States have
2024-25 (BE). projected their revenue deficit to remain unchanged
1.41 Capital expenditure and capital outlay of at 0.2 per cent (of GDP at market prices) and their
the union government contracted (y-o-y) by 35.0 per consolidated fiscal deficit to rise marginally to 3.2
cent and 35.4 per cent, respectively, during Q1:2024- per cent in 2024-25 (BE) (Table 1.5).
25, largely due to the model code of conduct being 1.44 States’ outstanding liabilities, which peaked
in force during the general elections. Subsequently, at 31.0 per cent of GDP in March 2021, declined
however, capital expenditure and capital outlay subsequently with fiscal consolidation and are
grew by 10.3 per cent and 14.6 per cent (y-o-y), budgeted at 28.8 per cent of GDP by end-March 2025.
respectively, in Q2:2024-25. The medium-term objective is to bring it down to the
1.42 The ratio of central government debt to Table 1.5: State Governments - Key Deficit Indicators
GDP, which peaked at 62.7 per cent in 2020-21 due (per cent of GDP)
to public policy measures to mitigate the impact Deficit Indicators 2021-22 2022-23 2023-24 2024-25
of the COVID-19 pandemic, has been moderating (PA) (BE)
Revenue Deficit 0.4 0.2 0.2 0.2
subsequently and is estimated at 56.8 per cent
Gross Fiscal Deficit 2.8 2.7 2.9 3.2
in 2024-25 (BE). The ratio of interest payment
Primary Deficit 1.0 1.0 1.4 1.5
to revenue receipts is also budgeted to decline to
Note: PA: Provisional Accounts; BE: Budget Estimates.
37.2 per cent from 39.1 per cent in 2023-24 (RE). Sources: Budget document of States and CAG.

20
 Financial Stability Report December 2024

Chart 1.30: Debt and Interest Burden - State Governments developmental and capital expenditure capacities
as well as debt servicing headroom in the medium
to long term.

1.45 India’s general government debt and fiscal

deficit remain higher than those of the peer EMDEs
(Chart 1.31 a and b). Supported by ongoing fiscal
consolidation, however, they are expected to decline
over the medium term and trend towards the EMDE
average.

I.2.5 Household Finance

Note: RE: Revised Estimates; BE: Budget Estimates. 1.46 At 42.9 per cent of GDP (at current market
Sources: Budget document of States and CAG.
prices) in June 2024, India’s household debt is
relatively low compared to other EMEs, however, it
20 per cent threshold recommended by the Fiscal has increased over the past three years (Chart 1.32
Responsibility and Budget Management (FRBM) a). Even as household debt is on a rising trend, the
Review Committee (2018). States’ debt servicing increase is driven by a growing number of borrowers
cost has been on a declining trend since 2020-21 rather than an increase in average indebtedness
(Chart 1.30). Notwithstanding the overall gains in (Chart 1.32 b).
consolidating state finances, a few larger states have 1.47 Borrowing by individuals25 in the household
ratios of debt to gross state domestic product (GSDP) sector constituted around 91 per cent26 of the stock of
exceeding 35 per cent, with implications for their household financial liabilities as at end- March 2024.

Chart 1.31: India, AEs and EMDEs – Debt and Fiscal Deficit

Note: Dotted lines represent forecasts.

Source: IMF.

25
Excludes loans to other segments of the household sectors {viz., microfinance, household-others, proprietary firms, partnerships concerns, Hindu
undivided families (HUF), partnership firms, joint liability groups, non-government organisations (NGOs) and trusts}.
26
Based on consumer bureau reporting.

21
Chapter I Macrofinancial Risks

Chart 1.32: Household Debt and Decomposition

Note: Unique borrowers are defined as distinct borrowers who have at least one loan account (irrespective of the product) outstanding at the end of respective period
(including new to credit borrowers).
Sources: BIS, TransUnion CIBIL and RBI staff calculations.

Disaggregated analysis of the nature of individuals’ 1.48 Borrower-type analysis revealed that sub-
borrowings shows that loans are primarily used prime borrowers availed loans primarily for
for consumption (personal loans, credit cards, consumption purpose, whereas super-prime
consumer durable loans and other personal loans), borrowers used debt for asset creation, especially
asset creation (mortgage loans and vehicle loans housing (Chart 1.34 a and b).
and two-wheeler loans) and for productive purposes 1.49 Per capita debt of individual borrowers27
(agriculture loans, business loans and education has increased sharply for super-prime borrowers
loans) (Chart 1.33 a). Notably, close to two-thirds of in the recent period, while it has remained stable
the portfolio is of prime and above credit quality for other risk tiers. From a debt-servicing capacity
(Chart 1.33 b). perspective, the rise in per capita debt only among

Chart 1.33: Household (Individual) Borrowings from Financial Institutions (by Amount)

Sources: TransUnion CIBIL and RBI staff calculations.

27
Debt outstanding divided by number of live unique borrowers at the end of each period.

22
 Financial Stability Report December 2024

Chart 1.34: Distribution of Debt by Borrower Category (September 2024)

Sources: TransUnion CIBIL and RBI staff calculations.

Chart 1.35: Per Capita Debt of Household (Individual) Borrowers

highly rated borrowers and use of debt for asset

creation are credit positive and financial stability
enhancing (Chart 1.35).
I.2.6 Financial Markets
1.50 Since the June 2024 issue of the FSR,
financial conditions have eased further on the back
of improvement in system liquidity and the shift in
monetary policy stance to neutral. This was reflected
in the softening of short-term money market rates
as well as yields on government securities and
Sources: TransUnion CIBIL and RBI staff calculations.
corporate bonds (Chart 1.36 and 1.37 a and b).

Chart 1.36: Financial Conditions Index - India

Note: For details, refer to Box IV.2 of the Monetary Policy Report (October 2024).
Source: RBI staff calculations.

23
Chapter I Macrofinancial Risks

Chart 1.37: Money Market Rates, Bond Yields and System Liquidity

Note: Data as on December 11, 2024.

Source: Bloomberg.

1.51 Banks increasingly relied on issuance of Bills) rose marginally and averaged 27 bps during
certificates of deposits (CDs) and NBFCs took July-December (up to December 11, 2024) vis-à-
recourse to issuances of commercial paper (CP) to vis 18 bps during January-June 2024 (Chart 1.39 a
close their funding gaps. As a result, money market and b).
spreads have risen since mid-2024 (Chart 1.38 a
1.53 In the corporate bond market, NBFCs
and b).
remained the largest issuers, with private placement
1.52 The sovereign yield curve bull steepened being the preferred mode for bonds listed on
(i.e., short-term rates fell faster than long-term recognised exchanges. Amidst moderation in direct
rates), supported by the improvement in system funding from banks, NBFCs attempted to diversify
liquidity and change in monetary policy stance. their funding sources through higher issuance of
Consequently, the term spread in the G-sec listed non-convertible debentures (NCDs). Banks and
market (viz., 10-year bonds minus 91-day Treasury corporates together subscribed to nearly two-thirds

Chart 1.38: CD Issuances and Money Market Spreads

Notes: (1) Issuances are rolling average of past 8 fortnights.

(2) Dotted lines indicate average spread from January 01, 2022 to December 11, 2024.
(3) DMA – Daily moving average.
Source: Refinitiv.

24
 Financial Stability Report December 2024

Chart 1.39: Sovereign Yield Curve and Term Spread

Sources: FBIL and Bloomberg.

of listed corporate bond issuances during 2024-25 for AA category since June 2024 even as select lower
(Chart 1.40 a, b, c and d). rated borrowers (below AA) have been able to attract
1.54 Corporate bond spreads have shown a mixed competitive pricing in primary market issuances.
trend across rating categories. Spreads have widened Median spreads of NCDs have been higher in 2024

Chart 1.40: Listed Corporate Bond Issuance and Subscription (Apr-Nov 2024)

Notes: (1) * May not add upto 100 per cent as minor categories are not shown.
(2) QIBs: Qualified Institutional Buyers; MFs: Mutual funds; HFCs: Housing Finance Companies.
Sources: NSDL and CDSL.

25
Chapter I Macrofinancial Risks

Chart 1.41: Corporate Bond Spreads

Sources: Bloomberg, NSDL and CDSL.

than a year ago, largely due to the sharper fall in to 8.3 per cent for MSCI Emerging Markets Index
G-sec yields of comparable maturity (Chart 1.41 a, b (MSCI-EMI) as on December 12, 2024. This has led
and c). to increase in India’s weightage in the MSCI-EMI
from 9.2 per cent in March 2019 to 19.9 per cent in
1.55 The Indian equity market, which rose to
November 2024 (Chart 1.42 a and b).
record highs in late-September 2024, has witnessed
correction due to deceleration in the pace of 1.56 Midcap, smallcap and microcap stocks
corporate earnings and concerns about market yielded returns of over 30 per cent even as the
valuation. It has, however, outperformed emerging broader Nifty 50 Index posted annualised returns
market peers in 2024 so far, with the MSCI India of 17 per cent (Table 1.6). A decomposition of equity
Index recording a return of 19.5 per cent compared returns using a standard discounted cash flow model

Chart 1.42: Equity Market Performance

Sources: Refinitiv, NSE, MSCI, Bloomberg and RBI staff calculations.

26
 Financial Stability Report December 2024

Table 1.6: Returns of Nifty Benchmark Indices Chart 1.43: Equity Return Decomposition
(per cent)
CAGR Nifty Nifty Nifty Nifty Nifty
50 100 Midcap Smallcap Microcap
150 250 250
1-year 17 21 32 35 44
2-years 15 17 33 37 51
3-years 12 13 23 24 36
Note: CAGR as on December 12, 2024.
Source: NSE.

suggests that higher risk appetite, as reflected in the

equity risk premium, has been the major driver of
the Nifty Midcap 100 Index in contrast to the Nifty
50 Index, which is supported by earnings growth
(Chart 1.43 a and b).
1.57 Despite the recent correction, equity
valuations remain elevated across metrics, such as
trailing and forward price-to-earnings (P/E) ratios,
market capitalisation-to-GDP and earnings yield
(Chart 1.44 a, b, c and d). Sources: Bloomberg and RBI staff calculations

Chart 1.44: Broader Equity Market Valuations

Note: * Arithmetic mean of standardised price-to-book, Market Capitalisation-to-GDP, 10-year G-sec yield over Sensex Earnings Yield and Price-to-Earnings ratios. GDP data
up to September 2024.
Sources: Refinitiv, NSE, MSCI, Bloomberg and RBI staff calculations.

27
Chapter I Macrofinancial Risks

Chart 1.45: Midcap, Smallcap and Microcap Valuation

Sources: SEBI, NSE, Bloomberg and RBI staff calculations.

1.58 Stretched valuations are more prominent scrips traded with a P/E ratio above their respective
in midcap and smallcap stocks. Notably, the Nifty benchmark P/E ratios (Chart 1.45 c).
Midcap 150 Index was trading at P/E ratios close to
1.59 To justify the current valuations for all
43.7 in mid-December 2024 compared to its long-
indices, the required earnings growth should exceed
term average of 34.8 (Chart 1.45 a and b). Moreover,
the expected earnings growth to forestall a large
despite a sharp increase in the benchmark P/E ratio
from 34 in March 2024 to 42 in November 2024, 56 and abrupt market correction. Q2:2024-25 corporate
per cent of stocks in the Nifty Midcap 150 Index results, however, indicate a slowdown in earnings
were trading higher than the benchmark P/E. as reflected in earnings per share (EPS) estimates
Similarly, 64 per cent of both smallcap and microcap (Chart 1.46 a and b).

Chart 1.46: Earnings and Valuations

Sources: Bloomberg and RBI staff calculations

28
 Financial Stability Report December 2024

Chart 1.47: Trends in Net Investments

Note: (1) * Data up to December 12, 2024; The format of data reporting by NSDL for FPI flows has changed with effect from September 2024. As a result, figures from
September 2024 onwards in the chart exclude flows to mutual funds and AIFs and include flows to Debt-FAR.
(2) # DIIs – Domestic institutional investors.
Sources: NSDL, NSE, BSE and SEBI.

1.60 Foreign portfolio investors sold equities crore in as at end-March 2024. A study conducted by
worth US$ 11.2 billion in October 2024, marking the the Securities and Exchange Board of India (SEBI)28
highest recorded FPI monthly outflow. In contrast, to analyse trends in intraday trading by individual
domestic investors (institutional investors, mutual investors before and after the COVID-19 outbreak
funds and individuals combined) remained net found that the number of individuals trading
buyers of equities for the eleventh consecutive intraday in the equity cash segment has increased
month as well as in 15 of the last 16 months. Foreign by close to five times, from 15 lakh in 2018-19 to
portfolio investors were, however, net buyers in the 69 lakh in 2022-23, and the share of young intraday
debt market (Chart 1.47 a and b). traders (aged less than 30 years) has grown to 48 per

1.61 Strong demand for equities, especially

Chart 1.48: Demand for and Supply of Equities
from domestic investors, has outpaced supply of
primary market issuance through public issues
{initial public offerings (IPOs) and follow-on public
offerings (FPOs)}, qualified institutional placements
(QIPs) and offer-for-sale (OFS) since the pandemic
(Chart 1.48).

1.62 The demand-supply mismatch in securities

indicates investors’ preference for short-term
returns through secondary market investments over
long-term capital formation. This is reflected in the
unprecedented growth in the total number of demat
Note: * Data up to October 2024; Foreign Portfolio Investors demand data includes
accounts held by individual investors, which rose both primary and secondary market investments but for DIIs and Individual
investors, only secondary market investments are presented. DIIs includes Banks,
from four crore at the end of 2019-2020 to fifteen Development Financial Institutions, Insurances, New Pension Schemes and MFs.
Sources: SEBI, NSE, BSE, Capitaline, Bloomberg and RBI staff calculations.

28
SEBI (2024), “Analysis of Intraday Trading by Individuals in Equity Cash Segment”, July.

29
Chapter I Macrofinancial Risks

Chart 1.49: Intraday Trading by Individuals in Equity Cash Segment

Source: SEBI.

cent from 18 per cent. Notably, a substantial share contributed by them in the futures and options
of traders has incurred losses and the proportion (F&O) segment rose by 118 per cent to ₹4,107 lakh
of loss-making investors rose in tandem with crore between September 2022 and September 2024.
frequency of trading (Chart 1.49 a and b). In a follow-up to the study30 published in January
1.63 An analysis of investor behaviour in 2023 by the SEBI, which found that 89 per cent of
Main Board IPOs by the SEBI29 corroborated this individual equity F&O traders lost money in 2021-
investment pattern, with individual investors 22, the SEBI published another study31 in September
engaging in ‘flipping’ behaviour, selling 50 per cent 2024, that showed the aggregate losses of individual
of shares allotted to them by value within a week traders exceeded ₹1.8 lakh crore over the three-year
of listing. Moreover, investors exhibited greater period between 2021-22 and 2023-24. Moreover, 93
propensity to sell IPO shares that posted positive per cent of over 1.13 crore individual F&O traders
listing gains as compared to those that listed at a incurred average losses of around ₹2 lakh per trader.
loss. Individual investors offloaded more than two- On the other hand, proprietary traders and foreign
thirds of shares that gave a return of more than 20 portfolio investors with sophisticated trading
per cent within a week. knowledge registered significant profits. The study
1.64 Activity in the equity derivatives segment also revealed that the proportion of young traders
remained strong. As at end-September 2024, there (below 30 years) in the F&O segment rose from 31
was an increase of 59 per cent (y-o-y) in the turnover per cent to 43 per cent during this period. Over 75
in futures contracts and 25 per cent in the options per cent of individual F&O traders in 2023-24 had
segment (notional turnover). Despite a sizeable declared an annual income of less than ₹5 lakh
share of individual investors making losses, turnover and more than three-fourths of loss-making traders

29
SEBI (2024), “Analysis of Investor Behavior in Initial Public Offerings (IPOs)”, September.
30
SEBI (2023), “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment”, January.
31
SEBI (2024), “Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24)”, September.

30
 Financial Stability Report December 2024

continued trading in F&O market despite making and similar measures, to influence stock prices.
losses in consecutive years. Accordingly, in October Accordingly, the SEBI has issued orders against
2024, the SEBI took several measures to strengthen certain entities engaging in such activities and also
the equity index derivatives market for increased issued advisory urging investors to remain vigilant
investor protection and market stability. and cautious when considering investments in SME
1.65 An emerging area of concern relates to IPOs securities.
of small and medium enterprises (SMEs). There 1.66 Amidst periods of volatility in international
has been a sharp increase in demand for SME IPOs, foreign currency markets and the strengthening
with several IPOs oversubscribed 100 times or of the US dollar relative to other currencies, the
more on account of rising participation from retail
domestic foreign exchange market has stayed
investors. In many cases, there appears to be no
steady, supporting overall macroeconomic stability.
direct correlation between company fundamentals
The Indian Rupee (INR) remains one of the most
and the sharp rise in stock prices of SMEs. The
stable currencies among emerging market currencies
SEBI has observed that some SME companies and/
(Chart 1.50 a and b).
or their promoters engaged in practices that present
an overly optimistic or unrealistic view of their 1.67 Several indicators, such as the real effective
operations following their listing on exchanges, exchange rate (REER), the exchange market pressure
which are often followed by corporate actions, such (EMP) index32, implied volatility derived from
as bonus issues, stock splits, preferential allotments option prices and onshore-offshore spreads also

Chart 1.50: Exchange Rate Movements

Note: (1) * Bloomberg Asia Dollar Index (Inverted) aims to replicate the performance of USD against nine Asian currencies.
(2) # Change between end-June 2024 and December 12, 2024.
Sources: Bloomberg, RBI and staff calculations.

32
EMP index is used to measure external pressures on the currency and is constructed as a weighted average of exchange rate movements and changes
in forex reserves.

where ∆et is the y-o-y percentage change in exchange rate relative to the U.S. Dollar at time t, and ∆rt is the y-o-y percentage change of foreign exchange
reserves at time t as a fraction of the monetary base (M3). and are the historical standard deviations of the two variables, respectively. For more
details, see Appendix 3.1 of IMF World Economic Outlook April 2007.

31
Chapter I Macrofinancial Risks

Chart 1.51: Exchange Rate Stability Indicators

Notes: (1) * Trade weighted REER index is based on 40 currency basket (monthly average)
(2) # The EMP index uses standardised changes in exchange rates and forex reserves to measure the net pressure on an exchange rate. Negative numbers indicate
increased depreciation pressure.
(3) @ Implied volatility is derived from At-the-Money 1-month Option prices. Data as on December 12, 2024.
Sources: Bloomberg and RBI staff calculations.

underscore the stability of the USD-INR exchange risen even as financial integration has increased.
rate (Chart 1.51 a, b, c and d).
Thus, the resilience of EMEs is tested time and
1.68 Global developments constitute a major
again in episodes involving global financial turmoil
channel for spillovers in EMEs affecting financial
with the degree of impact determined by the extent
conditions, broader financial system and the
economy. Vulnerability to external shocks have of transmission of spillovers (Box 1.1).

32
 Financial Stability Report December 2024

Box 1.1 - Transmission of Global Spillovers to Domestic Financial Conditions

Monetary policy decisions in systemic advanced Table 1: Dynamic Correlation between FCI, Sub-components of
FCI and Global Spillover Index
economies have a spillover effect on emerging
Lead in Global Spillover Index
market economies through their impact on bond
(t = months)
yields, equity prices, capital flows, and exchange rate 0 1 2 3
movements (IMF, 2015). Accordingly, risks from global FCI 0.23 0.26 0.24 0.16
spillovers to domestic financial stability remain a key Sovereign Risk -0.14 -0.16 -0.16 -0.15
concern. Risk Premium 0.09 0.17 0.16 0.02
Foreign Exchange 0.33 0.32 0.29 0.27
In order to assess the impact of global spillovers on
Market
domestic financial conditions, a two-step procedure is Equity Market 0.46 0.47 0.42 0.36
adopted. First, a global spillover index is constructed Money Market 0.01 0.02 0.02 -0.06
by using a set of financial variables based on a Dynamic Sources: Bloomberg and RBI staff calculations.
Factor Model33 (Patra et al., 2016). The global spillover
index traces all major events that capture adverse as equity and foreign exchange markets. The equity
global macro-financial developments, including wars market shows the strongest correlation with the
and COVID-19 (Chart 1). The dynamic correlations global spillover index, indicating its central role in
show greater sensitivity to certain components of transmitting global spillovers to domestic financial
the domestic financial conditions index (FCI)34 such conditions (Table 1).

Chart 1: Global Spillover Index (Standardised)

Sources: Bloomberg and RBI staff calculations.

(Contd.)

33
Global Spillover Index (VIX, US Dollar Index, term premium, risk premium and LIBOR-OIS spread) has been constructed using the DFM methodology.
Global Spillover Index utilises the 3-month LIBOR-OIS spread up to June 2023 and transitions to the 3-month SOFR-OIS spread from July 2023 onwards.
It is assumed that each standardised variable Yt,i can be decomposed into an unobserved common component Ft and a disturbance term ϵt,i This
relationship can be mathematically represented as follows:
Yt,i = γi * Ft + ϵt,i (Factor Loadings)
Ft = β * Ft–1 + ωt (auto-correlated factors)
εt,i = α * εt-1,i + δt,i (auto correlated errors)
Ft is a vector of common factors that follows a VAR(p) process; γi is the factor loading of Ft, showing the relevance of each variable Yt,i in the Spillover
Index and εt,i represents idiosyncratic shocks specific to the ith variable at time ‘t’. The parameters are obtained by maximum likelihood estimation
using Kalman filter.
34
FCI for India is estimated using twenty financial market indicators, with chosen indicators representing five market segments, namely (i) the
money market; (ii) the G-sec market; (iii) the corporate bond market; (iv) the forex market; and (v) the equity market. For details, refer Box IV.2 of the
Monetary Policy Report (October 2024).

33
Chapter I Macrofinancial Risks

Second, a three-variable Vector Autoregression (VAR) magnitude of the impact remains moderate and is seen
model is used to assess the impact of the global spillover primarily in equity and foreign exchange markets.
index on domestic financial conditions and bank In contrast to financial conditions, the IRF for credit
credit growth. The impulse response function (IRF) growth (Chart 2 b) reveals an insignificant response to
plot for the FCI (Chart 2 a) demonstrates a statistically spillover shocks, suggesting global spillovers have little
significant response to spillover shocks, although the impact on the bank lending channel.

Chart 2: Impulse Response from Global Spillover Index

Sources: Bloomberg and RBI staff calculations.

References:
1. International Monetary Fund (2015), “2015 Spillover Report”, December.
2. Patra, M. D., Pattanaik, S., John, J., Behera, H. K. (2016), “Monetary policy transmission in India: Do global
spillovers matter?”, Reserve Bank of India Occasional Papers, 37(1), 1-34.

I.2.7 Banking Stability Indicator

1.69 The banking stability indicator (BSI)35, in the net interest margin (NIM) abetted by shift
which provides an assessment of the resilience of deposits to higher interest rate buckets. The
of the domestic banking system, showed further efficiency dimension strengthened, with reduction
improvement during H1:2024-25. While stronger in cost-to-income ratio as well as staff cost. The
capital buffers boosted the soundness dimension, market dimension of the BSI also improved due to a
declining NPAs and improved provisioning bolstered fall in risk weighted assets (RWAs) for market risk. A
asset quality. Despite improvement in return decline in the liquidity coverage ratio (LCR) and the
on assets (RoA) and earnings before provisions liquid asset ratio weakened the liquidity dimension,
and taxes, the profitability dimension remained although banks have sufficient liquidity buffers
unchanged, weighed down by a sequential decline relative to the regulatory minimum (Chart 1.52).

35
The BSI has been revised from this issue of the FSR. Methodology and variables used for compiling each BSI dimension are provided in Annex 2.

34
 Financial Stability Report December 2024

Chart 1.52: Banking Stability Map capital, stood at 14.0 per cent, well above the
regulatory requirement of 8 per cent (including the
capital conservation buffer). The banks’ net interest
margins (NIM) and profitability also remained solid.
Consequently, their returns on assets (RoA) and
returns on equity (RoE) rose to 1.4 per cent and 14.1
per cent, respectively, in September 2024 (Chart
1.53 a and b).

1.71 Buoyed by falling slippages, higher write-

offs and steady credit demand, the gross non-
performing assets (GNPA) ratio37 of scheduled
Note: Away from the centre indicates increase in risk.
Sources: RBI supervisory returns and staff calculations. commercial banks (SCBs) fell to a multi-year low
of 2.6 per cent. Alongside, net non-performing
I.2.8 Banking System36
assets (NNPA) ratio declined to 0.6 per cent,
1.70 The resilience of the domestic banking aided by strong provisioning. Additionally, the
system has been bolstered by robust capital buffers, special mention accounts – 2 (SMA-2) ratio38,
strong earnings and sustained improvement in which is a lead indicator of asset quality, is also
asset quality. The common equity tier 1 (CET1) ratio, displaying low potential impairment (Chart 1.54 a,
which represents the highest quality of regulatory b and c).

Chart 1.53: Capital and Profitability

Source: RBI supervisory returns.

36
The analyses done in this section are based on domestic operations of SCBs (excluding SFBs), unless otherwise stated.
37
GNPA ratio is the share of gross non-performing assets in gross loans and advances.
38
Special mention account (SMA) is defined as:
a) For loans with revolving facilities (e.g. cash credit/ overdraft): if outstanding balance remains continuously more than the sanctioned limit or
drawing power, whichever is lower, for a period of 31-60 days - SMA-1; 61-90 days - SMA-2.
b) For loans other than revolving facilities: if principal or interest payment or any other amount wholly or partly overdue remains outstanding up
to 30 days - SMA-0; 31-60 days - SMA-1; 61-90 days - SMA-2.

35
Chapter I Macrofinancial Risks

Chart 1.54: Asset Quality

Source: RBI supervisory returns.

1.72 While the banking sector is assessed to be the KRI framework were found deficient in three or
broadly resilient, a few banks are found vulnerable, more KRIs. In terms of asset size, this represented
when measured under the key risk indicators (KRIs)39 two-thirds. In September 2024, however, only three
framework. Outlier banks are flagged when they are banks forming 15 per cent of total banking system
found to be deficient across multiple risk indicators assets have been found to be deficient in three KRIs
(11 risk indicators40 over five risk dimensions). At the and none are flagged deficient in more than three
beginning of the current decade, three-fourths out of KRIs (Chart 1.55 a and b).
33 public and private sector banks analysed under

Chart 1.55: Banks Signalling Vulnerabilities in Three or More Areas of Risk

Sources: CMIE, RBI supervisory returns and staff calculations.

39
KRI framework developed by the IMF measures vulnerability of banks by integrating the CAMELS supervisory framework with market-based metrics
and flags institutions based on specified thresholds that vary by jurisdictions. For more details, refer to Chapter 2 of Global Financial Stability Report
(October 2023); https://www.imf.org/en/Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023.
40
Out of the 12 indicators prescribed by the IMF, all indicators, except dividend growth forecast, have been used for this analysis. The KRI thresholds
are those prescribed for Asia.

36
 Financial Stability Report December 2024

Chart 1.56: Loan-Deposit Divergence – Long Term Dynamics

Note: (1) Updated till December 13, 2024. Data for November and December updated from Weekly Statistical Supplement (WSS).
(2) Credit growth includes the impact of merger of a non-bank with a bank.
Sources: RBI and staff calculations.

1.73 Growth in bank loans and deposits running at 13.4 per cent {3-month moving average
moderated during H1:2024-25 and the wedge (3-MMA)} in September 2024, investments recorded
between them narrowed further. As noted in lower growth of 7.6 per cent (3-MMA), resulting
the June 2024 issue of the FSR, there have been in 11.2 per cent growth (3-MMA) in the combined
assets (loan + investment), same as deposit growth
multiple episodes of gaps between loan and deposit
of 11.2 per cent (3-MMA) (Chart 1.57 a and b); (2)
growth (ranging from 2 to 4 years), but there has
increase in profits and resultant rise in equity
been eventual convergence (Chart 1.56).
capital has been a significant additional source of
1.74 An analysis of the loan-deposit gap reveals funds, which contributed to an increase in loan-
the following: (1) while the loan growth has been deposit ratio (Chart 1.58 a); and (3) banks’ reliance

Chart 1.57: Banking System – Balance Sheet Dynamics

Sources: RBI supervisory returns and staff calculations.

37
Chapter I Macrofinancial Risks

Chart 1.58: Banks’ Funding Gap

Sources: RBI supervisory returns and staff calculations.

on borrowings for bridging the financing gap rose as in Q4:2023-24 from (-) 10.3 per cent in Q1:2022-23
loan growth outpaced deposit growth leading to an (Chart 1.59 a and b).
increase in loan-deposit ratio (Chart 1.58 b). 1.76 Banks’ deposit profile has been changing,
with a decline in the share of low-cost CASA
1.75 With credit41 growth outpacing nominal GDP
deposits in favour of term deposits, especially for
growth for two successive years, the credit-GDP gap
higher interest rate buckets (Chart 1.60 a), indicating
(i.e., the difference between the credit-GDP ratio growing competition for savings and investor
and its long-term trend) narrowed to (-) 0.7 per cent preference for financial products offering higher

Chart 1.59: Credit and GDP Growth and Credit-GDP Gap

Notes: (1) * Credit growth includes the impact of merger of a non-bank with a bank.
(2) # Credit-GDP gap has been estimated with one sided Hodrick-Prescott Filter and Lambda = 400,000. Credit refers to loans and advances.
Sources: BIS, RBI and staff calculations.

41
Credit refers to loans extended by banks and excludes investments.

38
 Financial Stability Report December 2024

Chart 1.60: Deposit Profile and Profitability

Sources: RBI supervisory returns and staff calculations.

returns. For instance, term deposits formed 82 per loans, are fructifying. There has been a noticeable
cent of incremental deposits mobilised in H1:2024- slowdown in both retail loans and bank lending
25. Banks also raised more funds through higher cost to NBFCs from CAGR of 26.9 per cent and 28.7 per
certificates of deposits (CDs). Consequently, banks’ cent between September 2021 and September 2023
cost of funds rose by 148 bps since March 2022. As (when headline credit growth was 18.6 per cent) to
a result, banks’ NIM and profitability face pressure 13.0 per cent and 6.4 per cent (y-o-y), respectively,
from stiffer competition for funds (Chart 1.60 b). in September 2024 (Chart 1.61 a and b). Unsecured
retail lending growth also fell from 27.0 per cent to
1.77 Regulatory measures taken in November
15.6 per cent over this period.
2023 in the form of raising risk weights on certain
segments of consumer credit by banks and NBFCs as 1.78 Banks’ retail loan quality has remained
well as bank credit to NBFCs, especially unsecured stable so far: the GNPA ratio stood at 1.2 per cent in

Chart 1.61: Incremental Credit and Growth Rate in Select Sectors

Notes: (1) *Excludes MSME

(2) Retail loans refer to loans given to individuals and consist of (a) consumer credit (b) education loan (c) loans given for creating/enhancement of immovable assets
(e.g. housing, etc.) and (d) loans given for investment in financial assets (shares, debentures, etc.)
Sources: RBI supervisory returns and staff calculations.

39
Chapter I Macrofinancial Risks

Chart 1.62: Write-offs and Movements in GNPA

Notes: * Other adjustments include reduction of NPA due to upgradation, actual recoveries, etc.
Sources: RBI supervisory returns and staff calculations.

September 2024. Moreover, the SMA (1+2) ratio, a per cent, the SMA (1+2) ratio at 3.6 per cent and the
lead indicator of incipient stress, has also declined unsecured GNPA ratio at 4.7 per cent.
to 2.5 per cent in September 2024 from 3.0 per cent 1.79 Banks had 66.9 per cent of their investments
a year ago. The GNPA ratio for unsecured lending under the held-to-maturity (HTM) category, which
was marginally higher at 1.7 per cent. An area of is exempt from mark-to-market (MTM) valuation.
concern, however, is the sharp rise in write-offs, The decline in government bond yields has ensured
especially among private sector banks (PVBs), which no MTM loss on these investments.
could be partly masking worsening asset quality
1.80 The banking system liquidity coverage ratio
in this segment and dilution in underwriting (LCR) declined from 135.7 per cent in September
standards (Chart 1.62 a, b and c). Fresh accretion of 2023 to 128.5 per cent in September 2024, driven
NPAs in retail loan portfolios was also dominated by increase in net cash outflows, which, in turn, is
by slippages in the unsecured loan book, with 51.9 influenced by a rise in less stable sources of funding.
per cent from unsecured loans as at end-September LCR of public sector banks (PSBs) declined sharply
2024. Among bank groups, small finance banks from 142.1 per cent in September 2023 to 127.4 per
(SFBs) are witnessing larger impairment in their cent in September 2024, whereas LCR of PVBs stood
retail lending portfolio with the GNPA ratio at 2.7 marginally lower at 126.1 per cent (Chart 1.63 a and b).

40
 Financial Stability Report December 2024

Chart 1.63: Liquidity Coverage Ratio

Source: RBI supervisory returns.

I.2.9 Emerging Technology Risks

1.81 In an era defined by rapid technological on financial stability, including cyber vulnerability
advancements, the financial sector stands at the and third-party dependency, in addition to possible
forefront of innovation, embracing emerging introduction of biases in financial intermediation
technologies, which offer opportunities for and risks of unauthorised access. Indian banks are
fostering innovation and growth. At the same time, clearly sensitive to the benefits of adoption of these
their careful implementation and management is technologies as well as the potential risks associated
critical to obviate the associated risks impinging with them (Box 1.2).

Box 1.2: Emerging Technologies in Indian Banks

Emerging technologies have unlocked new frontiers A quick survey of major Indian banks on emerging
of opportunity for financial institutions, with a wide technologies42, conducted by the Reserve Bank in
range of avenues to streamline workflow and services, November 2024 to assess the level of adoption and
enhance operational efficiency, improve customer associated risks to the domestic financial sector
experience, reduce cost, strengthen risk management found that cloud computing and artificial intelligence/
and gain competitive advantage. In the Indian financial machine learning (AI/ML) were the two most widely
sector, the focus on emerging technologies has grown adopted emerging technologies among banks (Chart 1
rapidly during the post-pandemic period as reflected b). Cloud computing helps to reduce the cost of financial
in the state of progression as well as acknowledgement services by allowing easier access to infrastructure and
and commitment expressed in the annual reports facilitates economies of scale (Koh and Prenio, 2023).
of major banks and NBFCs (Chart 1 a). While these AI/ML is being implemented by respondents primarily
technologies have the potential to spur innovation and for customer service, sales and marketing, risk
drive efficiency in the financial sector, it is essential to management and know your customer (KYC) related
ensure that oversight mechanisms stay ahead of the processes. Notably, they are relying on outsourcing for
risks posed to the financial system (FSOC, 2023). emerging technologies, likely due to IT expertise and
(Contd.)

42
Survey on emerging technology adoption and risks in Indian banks across 12 PSBs and 19 PVBs.

41
Chapter I Macrofinancial Risks

Chart 1: Emerging Technology Adoption in India

Note: (1) * Based on 33 select SCBs and 15 NBFCs. Keywords considered are related to cloud computing, AI/ ML, regtech/ suptech, blockchain and DeFi, internet of
things and quantum computing.
(2) # Adoption score is compiled as the average of scores, ranging from 0 to 5, based on the level of adoption reported by individual banks. Bar breakup
represents share of survey respondents.
Sources: ProwessIQ and RBI staff calculations based on survey responses.

cost efficiency, with internal resources more focussed hierarchy of risks due to its ability to potentially break
on core competencies. In terms of spending, 61 per cent encryption algorithms (Auer et al, 2024). Importantly,
of the respondent banks have allocated less than 10 per over 80 per cent of the respondent banks have
cent of their IT budget on such initiatives during the fully or partially outsourced at least one emerging
current financial year. technology.
Respondents in the survey felt that cloud computing In terms of risk mitigation, banks have demonstrated
and AI/ML have emerged as technologies with the relatively better preparedness in maintaining backup
highest level of risk in relative terms (Chart 2 a). In of critical data. Larger banks are proactive in adopting
response to specific question on threats posed by mitigation measures due to availability of adequate
AI/ML, respondents identified third-party vendor resources and expertise (Chart 3). Regular compliance
risk, cybersecurity vulnerabilities and reputational audits and training of IT/ security personnel, however,
damage as key risks (Chart 2 b). Quantum computing are two important areas that require improvement
is perceived to be another emerging technology in the as per the respondents. Forensic preparedness and
Chart 2: Risks Related to Emerging Technologies

Note: * Risk score is compiled as the average of scores, ranging from 1 to 4, based on the level of risk reported by individual banks.
Source: RBI staff calculations based on survey responses.
(Contd.)

42
 Financial Stability Report December 2024

Chart 3: Relationship between Risk Mitigation and Size of Bank business continuity plans also need improvement to
strengthen resilience against emerging technology
related incidents.
References:
1. Financial Stability Oversight Council (2023),
“Annual Report”, US Department of Treasury,
December.
2. Koh, Ting Yang and Prenio, Jermy (2023), “Managing
cloud risk – some considerations for the oversight
of critical cloud service providers in the financial
sector”, BIS, FSI Insights on policy implementation
No 53, November.
Note: (1) Mitigation score is based on the steps taken by the respondents to 3. Auer, Raphael, Dupont, Angela, Gambacorta,
mitigate risks associated with emerging technologies. Leonardo, Park, Joon Suk, Takahashi, Koji, and
(2) Respondent banks categorised into small, medium and large buckets
based on 3-year average asset size. Valko, Andras (2024), “Quantum computing and
Source: RBI staff calculations based on survey responses. the financial system: opportunities and risks”, BIS
Paper No 149, October.

I.2.10 Non-Banking Financial Companies (NBFCs)43 44

1.82 As prudential increases in risk weights
Chart 1.64: NBFCs’ Loan Growth
on NBFC lending to certain consumer credit
categories as well as on bank lending to NBFCs
took fuller effect, NBFCs’ loan growth moderated
further during H1:2024-25 to 6.5 per cent (h-o-h)
in September 2024 (Chart 1.64). The impact was
particularly visible in the upper-layer NBFCs
(NBFC-UL) segment, which comprise primarily of
NBFC-ICCs45 with high share of retail lending (63.8
per cent) in their loan book. Middle-layer NBFCs
(NBFC-ML), excluding government-owned NBFCs,
however, maintained robust loan growth, especially
in retail loan portfolios. Source: RBI supervisory returns and staff calculations.

43
The analyses done in this section are based on NBFCs in upper and middle layers but excludes housing finance companies (HFCs), core
investment companies (CICs) and standalone primary dealers (SPDs), unless otherwise mentioned; data based on provisional data available as of
November 25, 2024.
44
The effect of mergers and reclassifications, if any, has not been considered for recasting historical data.
45
Non-Banking Financial Company - Investment and Credit Company.

43
Chapter I Macrofinancial Risks

1.83 The growth of bank borrowings in NBFCs’ Chart 1.65: Bank Lending to NBFCs and Bank Borrowings in
NBFCs’ Liabilities
liabilities also declined from 26.0 per cent to 17.0
per cent (Chart 1.65); reliance on non-bank sources
raised their cost of funds.
1.84 NBFCs increased their foreign currency
borrowings to diversify their sources of funds and
contain overall costs. The rise in foreign currency
borrowings could pose currency risks to these
NBFCs to the extent they are unhedged (Chart 1.66).
1.85 Equity capital recorded growth (y-o-y) of
26.5 and 17.9 per cent for non-government NBFC-
MLs and NBFC-ULs, respectively, in September Sources: RBI supervisory returns and staff calculations.
2024, forming 34.2 per cent and 18.4 per cent of
their total liabilities, respectively. Non-government Chart 1.66: Foreign Currency Borrowings by Outlier NBFCs –
NBFC-MLs are also witnessing rise in foreign equity. September 2024

The augmentation of equity has supported their

retail lending.
1.86 Overall, the NBFC sector remains healthy
with sizable capital buffers (CRAR stood at 26.1 per
cent in September 2024), robust interest margins
and earnings (NIM at 5.1 per cent and RoA at 2.9
per cent) and improving asset quality (GNPA at
3.4 per cent of gross loans and advances and SMA-
(1+2) at 3.5 per cent). Write-offs, however, show
a rising trend, with a few outlier NBFCs showing
significantly higher write-offs (Chart 1.67 a and b). Sources: RBI supervisory returns and staff calculations.

Chart 1.67: NBFCs – Financial Indicators

Sources: RBI supervisory returns and staff calculations.

44
 Financial Stability Report December 2024

I.2.11 Non-Banking Stability Indicator (NBSI) interlinkages with the other parts of the financial
1.87 The NBFC sector over the years have assumed system. Accordingly, an NBSI, like the BSI, and a
critical importance in the domestic financial system stability map are developed to assess the stability
both in terms of their role in providing credit to of the NBFC sector and to provide a snapshot of key
diverse sectors of the economy and their growing risk dimensions (Box 1.3).

Box 1.3: Non-Banking Stability Indicator

The Reserve Bank regularly publishes the BSI, a five dimensions – soundness, asset quality, profitability,
barometer to assess the stability of the banking sector, liquidity and efficiency. Each composite index is
and the financial system stress indicator (FSSI), a constructed using multiple financial ratios (Table 1)
composite indicator to monitor the aggregate stress which are first normalised for the sample period using
level in the Indian financial system, on a half-yearly the following formula:
basis in the FSR. On similar lines, to make an overall
assessment of the risk factors that have a bearing on the
stability of the NBFCs, a non-banking stability indicator
Where Xt is the value of the financial ratio at time t. If a
(NBSI) has been developed. With their asset size in the
variable is negatively related to risk, then it is normalised
financial system being second to the banking sector46
using 1-Yt. Composite index of each dimension is then
alongside the gradual rise in their credit intensity calculated as a simple average of the normalised ratios
(credit to gross domestic product (GDP) ratio)47, it is in that dimension. Finally, the non-banking stability
important to have a single snapshot of the health of the indicator is constructed as a simple average of the five
NBFC sector. composite indices. Thus, NBSI ranges from zero to unity
In line with the scale-based regulatory structure48, and its higher value denotes higher stress.
NBFCs falling in the upper and middle layers {excluding As the NBSI shows, the NBFC sector witnessed
the core investment companies (CICs), standalone several instances of stress during the last eight years.
primary dealers (SPDs) and housing finance companies Slowdown in economic activity, regulatory changes
(HFCs)} have been considered for construction of with respect to asset classification, failure of a large
Non Banking Stability Map and NBSI. The indicator NBFC and subsequent liquidity stress, the COVID-19
constitutes five composite indices representing risks in pandemic and monetary policy tightening were some of

Table 1: Ratios used for constructing the Non-Banking Stability Map and Indicator

Dimension Financial Ratios

Non-performing Loans net of
Soundness CRAR # Tier 1 Capital to Assets #
Provisions to Capital
Asset Quality Gross NPAs to Total Advances Provisions to Non-performing Loans # Sub-Standard Advances to Gross NPAs#
Profitability Return on Assets # Net Interest Margin # Return on Net Owned Funds #
Liquidity Short-term Liability to Total Assets Long Term Assets to Total Assets Dynamic Liquidity#
Efficiency Cost-to-Income Ratio Staff Expense-to-Total Expense Business-to-Staff Expense #
Note: # Negatively related to risk.

(Contd.)

46
Harsh, A., et al (2024), “Peeling the Layers: A Review of the NBFC Sector in Recent Times”, Reserve Bank of India Bulletin - September 2024
47
RBI. (2023). Report on Trend and Progress of Banking in India, 2022-23.
48
Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (RBI/DoR/2023-24/106 DoR.
FIN.REC.No.45/03.10.119/2023-24)

45
Chapter I Macrofinancial Risks

Chart 1: Non-Banking Stability Indicator (NBSI)

Note: Increase in value indicates increase in risk.

Sources: RBI supervisory returns and staff calculations.

Chart 2: Non-Banking Stability Indicator (NBSI) – Dimensions

Note: (1) Increase in value indicates increase in risk.

(2) Due to unavailability of ratios, liquidity and efficiency indicators are calculated from March 2020.
Sources: RBI supervisory returns and staff calculations.

the factors that contributed to stress in the NBFC sector Chart 3: Non Banking Stability Map
(Chart 1).
The stress in the NBFC sector, however, has abated in the
last few years as the NBSI returned to levels witnessed
prior to the 2018 crisis period. The improvement is
seen across all dimensions (Chart 2). Capital buffers
have consistently risen since 2019; asset quality, which
was the worst preforming risk dimension during the
COVID-19 pandemic, is showing steady improvement;
profitability remains strong; and liquidity buffers have
strengthened.
The Non Banking Stability Map also reflects
improvement in the NBFC sector stability both in
H2:2023-24 and H1:2024-25, with all risk dimensions Note: Away from the centre indicates increase in risk.
exhibiting receding levels of risk (Chart 3). Sources: RBI supervisory returns and staff calculations.

46
 Financial Stability Report December 2024

I.2.12 Microfinance loans from multiple lenders and those with higher
credit exposure, impairment remained high (Chart
1.88 Credit to the microfinance sector by banks
1.69 c and d).
(including SFBs), NBFC-MFIs and other NBFCs has
decelerated during the current financial year so far 1.90 Alongside rising delinquencies, borrower
after witnessing rapid growth during the last three indebtedness has risen notably: the share of
years. In terms of CAGR, credit to the microfinance borrowers availing loans from four or more lenders
sector grew by 24.4 per cent between June 2021 has increased from 3.6 per cent to 5.8 per cent
and March 2024 (11.0 per cent in terms of number during the last three years (September 2024 over
of borrowers) in which lending by NBFC-MFIs and September 2021). Also, the quarterly average ticket
other (non-MFI) NBFCs had risen by 33.5 per cent size of microfinance loans disbursal has risen by 43
and 33.4 per cent, respectively (Chart 1.68 a and b). per cent over this period (₹35,299 in Q2:2021-22 to
₹50,430 in Q2:2024-25). A comparison across select
1.89 The microfinance sector is showing signs of
Indian states indicates that indebtedness levels are
stress, with rising delinquencies across all types of
unevenly distributed, with some regions exceeding
lenders and ticket sizes. During H1:2024-25, share
the overall average (Chart 1.70 a and b).
of stressed assets increased, with 31-180 days past
due (dpd) rising from 2.15 per cent in March 2024 1.91 As credit to the microfinance sector surged
to 4.30 per cent in September 2024 (Chart 1.69 a and in the post-pandemic period, select NBFC-MFIs and
b). Importantly, among borrowers who had availed other NBFCs were found charging exceedingly high

Chart 1.68: Microfinance Sector – Credit and Borrowers

Notes: (1) * Represents 99.7 per cent of total lending to microfinance segment.
(2) NBFC-MFI is a non-deposit taking NBFC which has a minimum of 75 per cent of its total assets deployed towards microfinance loans.
(3) NBFCs are those that do not qualify as NBFC-MFI and can extend microfinance loans up to 25 per cent of their total assets.
Source: CRIF High Mark Credit Information Services Pvt. Ltd.

47
Chapter I Macrofinancial Risks

Chart 1.69: Stress in the Microfinance Sector

Note: * Based on borrower-level worst dpd. Numbers given in parentheses are the percentage share of loan portfolio outstanding in respective categories as at end-September 2024.
Source: CRIF High Mark Credit Information Services Pvt. Ltd.

interest rates, which invoked supervisory actions NBFC-MFI loans remains elevated especially since
by the Reserve Bank in October 2024. The yield on June 2023 (Chart 1.71).

Chart 1.70: Indebtedness in the Microfinance Sector

Note: * Average ticket size = Total amount disbursed during the quarter/ Total number of loans sanctioned during the quarter.
Source: CRIF High Mark Credit Information Services Pvt. Ltd.

48
 Financial Stability Report December 2024

Chart 1.71: Cost of Funds and Yield on Loans for NBFC-MFIs and middle-layer NBFCs) between March 2021
and December 2023. The regulatory measures
implemented during Q3:2023-24 to curb excessive
growth in this segment, however, slowed its pace
both at an aggregate level as well as across product
and lender types (Chart 1.72 a, b and c).

1.93 The moderation in consumer credit is

reflected in both credit inquiry volumes and
approval rates49. The former fell across most product
categories, with the largest decrease in the unsecured
Note: (1) Based on a common sample of select middle-layer NBFC-MFIs. retail loan portfolio, viz., personal loans and credit
(2) Cost of Funds = Annualised Interest Expense and Other Financing
Cost/ Average Total Borrowing.
cards segments, for which the risk weights were
(3) Yield on Loans = Annualised Interest Income/ Average Gross Loans.
Sources: RBI supervisory returns and staff calculations.
increased in November 2023 (Chart 1.73 a). Despite
the decline in loan approval rates, the share of
I.2.13 Consumer Credit premium borrowers (super-prime and prime-plus)
1.92 Post-pandemic, consumer credit has been in loan originations has risen sequentially during
a key driver of loan growth. In CAGR terms, it Q2:2024-25, suggesting that lenders are exercising
increased by 20.6 per cent as compared with 14.8 caution and underwriting standards are getting
per cent growth in overall credit (banks and upper- tighter (Chart 1.73 b and c).

Chart 1.72: Consumer Credit Growth

Note: * Upper-layer and Middle-layer NBFCs

Sources: TransUnion CIBIL and RBI supervisory returns

49
Approval rate is calculated as the percentage of accounts, which were opened within the next 90 days of the enquiry for home loans, property loans,
auto loan, commercial vehicle, construction equipment and education loans; and within the next 30 days of enquiry for all other loans. Approval rate
month is 30 – 90 days post the enquiry month.

49
Chapter I Macrofinancial Risks

Chart 1.73: Inquiry Volumes and Approval Rates

a. Inquiry Volumes by Product Type b. Approval Rates by Lender Type c. Origination by Risk Tier50 (by Amount)

Note: LAP: Loan against property; NTC: New to credit; NBFC+: NBFCs including HFCs.
Source: TransUnion CIBIL.

1.94 Delinquency levels in consumer credit loan portfolios. Moreover, upgradation is declining
remained stable for banks and NBFCs. However, and slippage from SMA-2 to NPAs are on the rise
rising impairment was seen in the unsecured retail (Chart 1.74 a, b and c).

Chart 1.74: Asset Quality of Retail Loans

Notes: (1) Roll Forward rate is the percentage change (by amount) from SMA-2 category (61-90 dpd) in the current month, which moved to NPA category (90+dpd) in the
next month (aggregated quarterly).
(2) Rollback + Cure rate is the percentage change (in amount) in SMA-2 category in the current month, which rolled back to SMA-1/ SMA-0/ 0 dpd in the next month
(aggregated quarterly).
Source: TransUnion CIBIL.

50
The segregation of risk tiers based on CIBIL scores is as follows-Super Prime:791-900; Prime Plus: 771-790, Prime:731-770; Near Prime:681-730; and
Sub Prime: 300-680.

50
 Financial Stability Report December 2024

1.95 Nearly half of the borrowers availing credit Chart 1.76: Category-wise Loan Originated with an Overdue
Personal Loan
card and personal loans have another live retail loan
outstanding, which are often high-ticket loans (i.e.,
housing and/or vehicle loan). Given that a default
in any loan category results in other loans of the
same borrower being treated as non-performing
by the lending financial institution, these larger
and secured loans are at risk of delinquency from
slippages in relatively smaller personal loans. First
default is mostly observed in unsecured advances;
among the borrowers at risk of default (i.e.,
advances in SMA category), risk of delinquency is
trending high amongst borrowers who in addition
to a personal loan or credit card outstanding have
Source: TransUnion CIBIL.
availed other retail loans (Chart 1.75 a and b).
1.96 11.0 per cent of the borrowers originating
than three live loans at the time of origination
a personal loan under ₹50,000 had an overdue
(Chart 1.76).
personal loan and over 60 per cent of them had
availed more than three loans during 2024-25 so 1.97 Lenders are, nevertheless, exercising
far. Moreover, nearly three-fifths of customers who prudence as the shares of below prime customers
have availed personal loan in Q2:2024-25 had more across lender and product types have been

Chart 1.75: Retail Loans at Risk

Notes: * Customers defaulted first time during April 2022 and June 2024 and having multiple products at the time of default.
Source: TransUnion CIBIL.

51
Chapter I Macrofinancial Risks

Chart 1.77: Consumer Loan Distribution by Risk Tier

Note: Numbers in parentheses indicate the share of each category of loan in total consumer credit as at end-September 2024.
Source: TransUnion CIBIL.

marginally lower when compared to a year ago the above ₹15 lakh income category recorded the
(Chart 1.77 a and b). highest growth. In terms of outstanding loans, the
₹5 lakh - ₹15 lakh income category had the largest
1.98 The decomposition of personal loans51
share as at end-September 2024 (Chart 1.78 a and b).
by income categories52 showed that after the high
growth phase during 2021-23, loan growth has 1.99 Unsecured personal loans dominated
moderated across all income categories between borrowings by borrowers with less than ₹5 lakh
September 2023 and September 2024, with income; higher income borrowers availed more
sharper deceleration in the group with less than secured loans, including housing loans (Chart 1.79 a
₹5 lakh annual income. During the same period, and b).

51
Personal loans refer to loans given to individuals and consist of (a) consumer credit (b) education loan (c) loans given for creating/enhancement of
immovable assets (e.g. housing, etc.) and (d) loans given for investment in financial assets (shares, debentures, etc.).
52
Based on survey responses from eight banks forming around 69 per cent of the personal loans of SCBs as of September 2024 and three upper-layer
NBFCs.

52
 Financial Stability Report December 2024

Chart 1.78: Profile of Personal Loans by Income Group

Sources: Individual submissions by financial institutions and RBI staff calculations.

I.2.14 Mutual Funds 1.101 Systematic investment plans (SIPs) have

1.100 Backed by a surfeit of new fund offers (NFOs) been a key driver of the recent growth in AUM of
and continued active participation of households, MFs. SIPs offered by MFs have been contributing to
the mutual fund (MF) sector experienced robust financialisation of household savings. By enabling
growth in 2024-25 (up to November 2024). Total periodic small investments, they have steadily
assets under management (AUM) rose by 38.8 per increased even amidst periods of higher market
cent (y-o-y), touching an all-time high of ₹68.1 lakh volatility. Both outstanding SIP accounts as well as
crore in November 2024 (Table 1.7). The AUM rise gross SIP contributions have reached record highs,
was driven by equity schemes (sectoral/ thematic with the latter crossing ₹25,000 crore in October
schemes in particular), with annual growth nearly 2024 (Chart 1.80).
1.5 times the rise in non-equity schemes.

Chart 1.79: Trend in Unsecured Personal Loans and Housing Loans by Income Group

Sources: Individual submissions by financial institutions and RBI staff calculations.

53
Chapter I Macrofinancial Risks

Table 1.7: Assets under Management of the Domestic Mutual Fund Industry
(₹ thousand crore)
As at end B30 AUM T30 AUM Industry AUM
Month Equity Non-Equity B30 Total Equity Non-Equity T30 Total Equity Non-Equity Total
Nov-23 551 357 908 1,486 2,511 3,997 2,037 2,868 4,905
Mar-24 639 376 1,015 1,714 2,611 4,325 2,353 2,987 5,340
Jun-24 758 416 1,174 2,015 2,927 4,942 2,772 3,343 6,115
Sep-24 864 449 1,313 2,252 3,145 5,397 3,115 3,594 6,709
Nov-24 846 454 1,300 2,194 3,313 5,508 3,040 3,768 6,808
Note: T30 refers to the top 30 geographical locations in India and B30 refers to the locations beyond the top 30 cities.
Source: AMFI.

1.102 Among different categories of MFs, 1.104 MFs are increasingly offering sectoral and
smallcap, midcap and largecap funds have thematic funds, which are attracting large inflows
witnessed net positive inflows for the last three from investors. In 2024-25 (up to November 2024),
quarters (Chart 1.81), despite bouts of outflows over inflows to these funds witnessed a seven-fold
frothy valuation concerns in respect of midcap and increase (y-o-y) to ₹1,16,426 crore (Chart 1.82).
smallcap stocks. As a result, net AUM of equity-oriented schemes
recorded a growth of 49.3 per cent (y-o-y) as at end-
1.103 Stress tests results and liquidity analysis
November 2024.
of midcap and smallcap equity schemes of all MFs,
published by AMFI, reveal that in November 2024, 1.105 Debt schemes have also attracted significant
the number of days to liquidate 25 per cent of the investments of ₹3.46 lakh crore in 2024-25 (up to
November 2024); money market, liquid and low
portfolio for the top 5 schemes ranged from 5 to
duration funds together formed 75 per cent of
17 days in midcap schemes and 11 to 33 days in
these inflows (Chart 1.83). Overall, the AUM of debt
smallcap schemes (Table 1.8).
schemes grew by 24.1 per cent (y-o-y) in November
2024.

Chart 1.80: Monthly SIP Contributions and Outstanding Chart 1.81: Net Inflows into Different Equity Schemes of
SIP Accounts Mutual Funds

Source: SEBI. Source: SEBI.

54
 Financial Stability Report December 2024

Table 1.8: Summary of Stress Tests and Liquidity Analysis of Midcap and Smallcap MF Schemes

Midcap Schemes Smallcap Schemes

Schemes/Month
Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Jul-24 Aug-24 Sep-24 Oct-24 Nov-24
No. of days to liquidate 25 per
cent of portfolio- Range for top 5 4 to 14 4 to 15 4 to 15 4 to 17 5 to 17 10 to 23 10 to 27 9 to 24 10 to 28 11 to 33
schemes w.r.t. AUM
Largecap 12.3 12.2 12.4 12.3 12.8 7.0 6.9 7.1 7.2 7.8
Concentration-
Assets side Midcap 67.3 67.4 68.1 68.6 68.0 11.5 11.3 10.8 10.7 10.6
(AUM held in Smallcap 15.9 15.3 14.9 14.6 14.5 75.5 75.7 75.6 75.5 75.0
per cent)
Cash 4.5 5.1 4.5 4.4 4.5 6.0 6.1 6.5 6.6 6.6
Source: AMFI.

I.2.15 Financial System Stress Indicator (FSSI) mild uptick in stress in the forex market, whereas
softening of BBB bond yields compressed stress
1.106 The FSSI, a comprehensive indicator of
in the corporate debt market. Banking and NBFC
the aggregate stress level in the Indian financial
sectors reported improvement in asset quality
system, eased to a record low in H1:2024-25. There
and robust capital buffers. The real sector’s
was broad-based decline in most components of
financials remained largely unaltered (Chart 1.84
the FSSI. Easing of financial market conditions
and 1.85).
and improvements in balance sheets of financial
intermediaries were key contributors to the easing I.2.16 Systemic Risk Survey
of stress. Higher foreign portfolio debt inflows 1.107 The latest round of the Reserve Bank’s
provided comfort to the government debt market systemic risk survey (SRS) conducted during
and was reflected in declines in both short-term November 2024 reflected a sanguine outlook, with
and long-term yields. In the money market, stress respondents categorising all major risk groups in
levels rose marginally as spreads of CPs, CDs and the ‘medium’ risk category. Among global risks,
the overnight index swap (OIS) vis-à-vis T-bill geopolitical conflicts/geo-economic fragmentation
rates widened. A rise in forex premium led to a emerged as a ‘high’ risk category, even as risks

Chart 1.82: Net Inflows in Open-Ended Equity-Oriented Schemes Chart 1.83: Net Inflows in Open-Ended Debt-Oriented Schemes

Source: SEBI. Sources: SEBI.

55
Chapter I Macrofinancial Risks

Chart 1.84: FSSI and its Broad Components Chart 1.85: Components of FSSI

Sources: DBIE, Bloomberg, RBI supervisory returns and staff calculations. Sources: DBIE, Bloomberg, RBI supervisory returns and staff calculations.

from commodity prices and monetary tightening outflows/rupee depreciation as major near-term
in advanced economies appear to have receded, risks (Chart 1.86).
compared to the May 2024 round of the survey.
1.108 60 per cent of the respondents assessed
Macroeconomic risks were perceived to have
better or similar prospects for the Indian banking
inched up, driven by growth and inflation concerns,
sector over a one-year horizon and expected asset
volatility in capital flows and a weak consumption
demand outlook. Climate risk remained in the quality to remain stable or improve owing to strong
‘high’ risk category even as its risk score fell domestic growth and the possibility of softening of
marginally. Over half of the respondents perceived interest rates. Higher delinquencies in select sectors
that the revival of private capex cycle is unlikely to (viz., microfinance and personal loans), however,
materialise in the near term. Financial market risks remain key downside risks to overall asset quality.
saw a slight dip in risk perception, while institutional Subdued consumption demand, regulatory focus on
risks were assessed to be at similar levels as in the unsecured loan growth and stricter underwriting
previous round of the survey. Among drivers of
financial risk, foreign exchange risk inched up and
Chart 1.86: Potential Risks to Financial Stability
risk from equity price volatility remained in the
‘high’ risk category. Among institutional risks, risks
from asset quality deterioration and profitability
were perceived to have moved up slightly, while
cyber risk remained in the ‘high’ risk category. The
majority of the respondents expressed confidence
in the overall stability of the global and domestic
financial system. Over 80 per cent of the respondents
expressed higher/ similar level of confidence in
the resilience of the Indian financial system. The
survey participants assessed geopolitical conflicts,
evolution of global growth and inflation, and capital Source: Systemic Risk Survey, November 2024.

56
 Financial Stability Report December 2024

standards amid rising delinquency levels in select gradually normalising monetary policy and financial
loan segments were perceived to weigh down credit conditions remain easy. While near-term risks
growth in the next six months, with 40 per cent of have ebbed, medium-term vulnerabilities such as
the respondents seeing a ‘marginal’ deterioration in stretched asset valuations, rising and elevated levels
credit demand prospects. of public debt, prolonged geopolitical tensions and
1.109 In response to a question on their views perils of emerging technologies could pose risks
on probable spillovers of a global shock on India’s to financial stability. Volatility spillovers from AEs
macroeconomic and financial stability, nearly 95 can be even more disruptive through the conduit
per cent of the respondents perceived ‘medium’ to of financial markets, highlighting the importance
‘limited’ near-term impact on domestic financial of proactive macroprudential policies and adequate
stability. On the other hand, about 60 per cent buffers to shield the financial system against these
of the respondents expected ‘high’ to ‘medium’ rapidly propagating negative externalities.
impact of global economic uncertainty on domestic
1.111 In this challenging global macroeconomic
macroeconomic stability. Detailed survey results
environment, the Indian economy remains on a
are provided in Annex 1.
strong growth trajectory underpinned by robust
Summary and Outlook macroeconomic fundamentals. While risks from
1.110 The global economy and the financial global spillovers remain, the Indian financial system,
system are exhibiting resilience despite bouts supported by further improvement in balance sheet
of volatility and heightened uncertainty. With of banks and NBFCs, and strong buffers, is expected
inflation moderating, major central banks are to remain sound and vibrant.

57
Chapter II Financial Institutions: Soundness and Resilience

Chapter II
Financial Institutions: Soundness and Resilience

The Indian banking system has remained resilient with robust capital buffers, strong operational performance,
and declining asset impairment. Macro stress tests indicate that banks’ aggregate capital would remain above the
regulatory minimum even under adverse scenarios. The NBFC sector witnessed robust credit growth while
maintaining strong balance sheet and profitability. In terms of bilateral exposures, interconnectedness among
financial sector entities continued to rise. Mutual funds remain the largest fund providers in the financial system,
whereas NBFCs are the largest receivers of funds.

Introduction Sections II.2 and II.3 examine the financial

parameters of urban cooperative banks (UCBs) and
2.1 Financial intermediation by banks and
NBFCs, respectively, including their resilience under
other financial institutions supports private
various simulations of stress. Sections II.4, II.5
sector funding needs as well as public finance
and II.6 examine the soundness and resilience of
requirements in a growing economy. Even as
mutual funds, clearing corporations and insurance
banking business has expanded at a strong pace,
sector, respectively. Section II.7 concludes the
asset quality and profitability have both witnessed
chapter with a detailed analysis of the network
sustained improvement, and capital positions
structure and connectivity of the Indian financial
have been strengthened. After the post-pandemic
system, with contagion analysis under adverse
acceleration, however, credit by both banks and
scenarios.
non-banking financial companies (NBFCs) in India
has recorded some moderation across major sectors II.1 Scheduled Commercial Banks (SCBs)1 2 3 4
during 2024 so far.
2.3 Against the backdrop of the recent monetary
2.2 This chapter presents stylised facts policy tightening cycle in India, bank deposits
and analyses on latest developments in the continue to exhibit double digit growth but their
domestic financial sector. Section II.1 outlines profile has gradually shifted towards schemes
the performance of SCBs in India through various offering higher returns (Chart 2.1 a). While term
parameters, viz., business mix; asset quality; deposit growth moderated for both PSBs and PVBs,
concentration of large borrowers; capital adequacy; they continue to outpace current and savings
earnings; and profitability. Macro stress tests and account (CASA) deposit growth (Chart 2.1 b). As on
sensitivity analyses are also performed to evaluate December 13, 2024, aggregate deposits of SCBs rose
the resilience of SCBs under adverse scenarios. (y-o-y) by 11.4 per cent.

1
Analyses are mainly based on RBI’s supervisory returns which cover only domestic operations of SCBs, except in the case of data on large borrowers,
which are based on banks’ global operations. For this exercise, SCBs include public sector banks, private sector banks and foreign banks.
2
The analyses done in the chapter are based on the data available as on December 12, 2024 which are provisional.
3
Personal loans refer to loans given to individuals and consist of (a) consumer credit, (b) education loan, (c) loans given for creating/enhancement of
immovable assets (e.g. housing, etc.), and (d) loans given for investment in financial assets (shares, debentures, etc.).
4
Private sector bank data for September 2023 quarter onwards are inclusive of merger of a large housing finance company with a private bank and
therefore, the data may not be comparable to past periods before the merger (applicable for all charts and tables).

58
 Financial Stability Report December 2024

2.4 The growth in bank credit has converged agricultural, services and personal loans segments
towards deposit growth - as on December 13, 2024, (Chart 2.1 d and e). Services and personal loans led
bank credit increased by 11.3 per cent (y-o-y). Bank the overall credit growth; within personal loans,
group-wise break-up shows a moderation in credit credit card receivables continued to post robust
growth for both PSBs and PVBs in September 2024; growth. Growth in personal loans has halved from
foreign banks (FBs) recorded a rise after a period of high levels on the back of both high base and lower
low growth (Chart 2.1 c). Industrial credit has been originations, but its expansion continued to be
accelerating from low levels but remains below broad-based, with housing loans as the standout
the growth in loans to other major sectors, viz., contributor (Chart 2.1 e, f, g and h).

Chart 2.1: Deposit and Credit Profile of SCBs (Contd.)

a. Deposit Growth (y-o-y) b. Growth in CASA and Term Deposits (y-o-y)

c. Credit Growth (y-o-y) d. Composition of Credit Portfolio

e. Credit Growth of Select Sectors (y-o-y)

59
Chapter II Financial Institutions: Soundness and Resilience

Chart 2.1: Deposit and Credit Profile of SCBs (Concld.)

f. Growth in Personal Loans: Category-wise (y-o-y)

Note: Numbers given in parentheses with the legend are the percentage shares of the respective sub-sector’s credit in total credit to personal loans as of end-
September, 2024. Vehicle/ auto loans and education loans for FBs have not been considered due to negligible amounts.

g. Contribution of Select Sectors to Credit Growth (y-o-y)

h. Contribution of Select Sub-segments to Growth in Personal Loans (y-o-y)

Notes: Transfer of retail business of a foreign bank to a PVB in March 2023 has impacted the growth rates of PVBs and FBs. The spurt in housing loans of PVBs in Sep-23 and
Mar-24 is attributable to the merger of a large housing finance company with a private bank.
Sources: RBI supervisory returns and staff calculations.

II.1.1 Asset Quality slippage ratio, measuring new accretions to NPAs

2.5 Asset quality of SCBs improved further, as a share of standard advances at the beginning
with their GNPA ratio declining to a 12- of the half-year, increased marginally to 0.7 per
year low of 2.6 per cent in September 2024 cent (Chart 2.2 c). The provisioning coverage
(Chart 2.2 a). The NNPA ratio5 remained at ratio (PCR)6 of SCBs improved further to 77.0 per
around 0.6 per cent (Chart 2.2 b). The half-yearly cent in September 2024, largely due to proactive

5
NNPA ratio is the proportion of net non-performing assets in net loans and advances.
6
PCR is the proportion of provisions (without write-offs) held for NPAs to GNPA.

60
 Financial Stability Report December 2024

provisioning by PSBs (Chart 2.2 d). The write-off to (Chart 2.2 e). Disaggregation of NPA movements
GNPA ratio for FBs increased in September 2024
7
reveals that write-offs remain a significant
while that of PSBs and PVBs declined marginally component of NPA reduction (Chart 2.2 f).

Chart 2.2: Select Asset Quality Indicators (Contd.)

a. SCBs’ GNPA Ratio b. SCBs’ NNPA Ratio

Note: GPNA ratio of all SCBs including small finance banks (SFBs) and overseas
operations stands at 2.5 per cent for Sep-24.

c. Half-Yearly Slippage Ratio d. Provisioning Coverage Ratio

Note: PCRs of PSBs, PVBs and all SCBs, including overseas operations, stand at
78.4, 73.6 and 76.8 per cent, respectively, for Sep-24.

e. Write-offs to Gross NPA

7
Ratio of write-offs (including technical/prudential write-offs and compromise settlement) during the period to GNPA at the beginning of the period.

61
Chapter II Financial Institutions: Soundness and Resilience

Chart 2.2: Select Asset Quality Indicators (Concld.)

f. Disaggregation of Movements in NPA

Note: Stock of GNPA, new accretions, reduction in NPAs due to upgradation, actual recoveries and write-offs have been derived as an index with GNPA stock as on
31st March, 2020 as 100.

Sources: RBI supervisory returns and staff calculations.

II.1.2 Sectoral Asset Quality (Chart 2.3 a). In the personal loans segment,
2.6 The improvement in asset quality of SCBs asset quality remained largely stable, except for a
was broad based across sectors and bank groups marginal uptick in respect of credit card receivables

Chart 2.3: Sectoral Asset Quality Indicators (Contd.)

a. Sector-wise GNPA Ratio and Stressed Advances Ratio

Note: Number given in parentheses with the legend are the shares of the respective sector's GNPA in total GNPA of SCBs as of end-September, 2024.

b. GNPA Ratio of Personal Loans by Category

Note: Number given in parentheses are the percentage shares of the respective sub-sector’s credit in total personal loans as of end-September, 2024; residual share
pertains to other personal loans. Vehicle/auto loans and education loans for FBs have not been considered due to negligible amounts.

62
 Financial Stability Report December 2024

Chart 2.3: Sectoral Asset Quality Indicators (Concld.)

c. GNPA Ratios of Industrial Sub-sectors

Note: Numbers given in parentheses with the legend are the percentage shares of the respective sub-sector’s credit in total credit to industry as of end-September,
2024.

Sources: RBI supervisory returns and staff calculations.

across bank groups, which recorded the highest credit faster than the reduction in their share in overall
growth within the personal loans segment and may credit (Chart 2.4 a). The asset quality of banks’ large
require careful monitoring. Within the industrial borrower portfolios has improved considerably,
sector, asset quality exhibited sustained improvement with the GNPA ratio falling from 4.5 per cent in
across the major sub-sectors (Chart 2.3 b and c).
March 2023 to 2.4 per cent in September 2024
II.1.3 Credit Quality of Large Borrowers 8
(Chart 2.4 b). SMA-1 and SMA-29 loans have,
2.7 The share of large borrowers in GNPA of however, risen sequentially (q-o-q) in the September
SCBs has steadily declined over the past two years, 2024 quarter (Chart 2.4 c). Furthermore, the SMA-2

Chart 2.4: Select Asset Quality Indicators of Large Borrowers (Contd.)

a. Share of Large Borrowers in Loans and GNPAs b. GNPA Ratio of Large Borrowers

8
A large borrower is defined as one who has aggregate fund-based and non-fund-based exposure of ₹5 crore and above. This analysis is based on SCBs’
global operations.
9
Special mention account (SMA) is defined as
(a) Loans in the nature of revolving facilities like cash credit/overdraft: if outstanding balance remains continuously in excess of the sanctioned
limit or drawing power, whichever is lower, for a period of 31-60 days - SMA-1; 61-90 days - SMA-2.
(b) Loans other than revolving facilities: if principal or interest payment or any other amount wholly or partly overdue remains outstanding up to
30 days - SMA-0; 31-60 days - SMA-1; 61-90 days - SMA-2.

63
Chapter II Financial Institutions: Soundness and Resilience

Chart 2.4: Select Asset Quality Indicators of Large Borrowers (Concld.)

c. Growth in SMAs and NPAs (q-o-q) d. SMA-2 Ratio of Large Borrowers

e. Composition of Large Borrowers’ Total Funded Amount Outstanding

f. Share of Top 100 Borrowers in Funded Amount Outstanding g. External Rating Profile of Large Borrowers –September 2024
and GNPAs of SCBs and Large Borrowers (LBs)

Note: For classification purpose, advances with long-term rating BB (or

equivalent) and below have been considered non-investment grade and advances
with long-term rating BBB (or equivalent) and above have been considered
investment grade. Only advances with long-term ratings are considered.

Sources: RBI supervisory returns and staff calculations.

ratio for large borrowers increased significantly for the past two years (Chart 2.4 e). Within the large
PSBs in September 2024 from a year ago, warranting borrowers’ cohort, the share of top 100 borrowers
close monitoring (Chart 2.4 d). In the large borrower has decreased to 34.6 per cent in September 2024,
segment, the share of standard assets in total reflecting a growing credit appetite among medium-
funded amount has consistently improved over sized borrowers. Notably, none of the top 100

64
 Financial Stability Report December 2024

borrowers are classified as NPAs in September 2024 II.1.5 Earnings and Profitability
(Chart 2.4 f). In terms of value, investment grade
2.9 Profitability of SCBs improved during
advances (rated BBB and above) constituted 91.5
H1:2024-25, with profit after tax (PAT) surging
per cent of the funded advances to large borrowers
by 22.2 per cent (y-o-y). PSBs and PVBs recorded
with long-term external ratings (Chart 2.4 g).
PAT growth of 30.2 per cent and 20.2 per cent,
II.1.4 Capital Adequacy respectively, while FBs experienced single digit
growth (8.9 per cent). The rise in other operating
2.8 CRAR and CET1 ratios of SCBs displayed
income (OOI) contributed significantly to the rise
similar movements and stood at 16.7 per cent and
in profits of PSBs and PVBs (Chart 2.6 a).
14.0 per cent, respectively, in September 2024,
which were much higher than the regulatory 2.10 The cost of funds has risen in sync with the
minimum (Chart 2.5 a and b). The overall Tier 1 monetary policy tightening cycle (Chart 2.6 b). On
leverage ratio10 remained stable (Chart 2.5 c). CRAR, the other hand, overall yield on assets remained
CET1 and leverage ratios of foreign banks declined broadly stable (Chart 2.6 c). As a result, net
marginally during H1:2024-25. interest margin (NIM) has marginally contracted

Chart 2.5: Capital Adequacy

a. Capital to Risk-weighted Assets Ratio b. Common Equity Tier 1 Capital Ratio

Note: CRAR of all SCBs including SFBs for Sep-24 stands at 16.8 per cent.

c. Tier 1 Leverage Ratio

Note: Tier 1 leverage ratio of all SCBs including SFBs for Sep-24 stands at 7.9 per cent.

Sources: RBI supervisory returns and staff calculations.

10
Tier I leverage ratio is the ratio of Tier I capital to total exposure.

65
Chapter II Financial Institutions: Soundness and Resilience

across all bank groups (Chart 2.6 d). Nevertheless, (RoA) ratios have improved in September 2024
both return on equity (RoE) and return on assets (Chart 2.6 e and f).

Chart 2.6: Select Performance Indicators of SCBs (Contd.)

a. Disaggregation of Earnings

b. Cost of Funds - Annualised c. Yield on Assets - Annualised

d. Net Interest Margin (NIM) - Annualised

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 Financial Stability Report December 2024

Chart 2.6: Select Performance Indicators of SCBs (Concld.)

e. Return on Equity (RoE) - Annualised f. Return on Assets (RoA) - Annualised

Note: RoEs for PSBs, PVBs and all SCBs, including overseas operations, stand at Note: RoAs for PSBs, PVBs and all SCBs, including overseas operations, stand at
15.9, 14.8 and 14.6 per cent, respectively, for Sep-24. 1.1, 1.8 and 1.4 per cent, respectively, for Sep-24.

Sources: RBI supervisory returns and staff calculations.

II.1.6 Liquidity II.1.7 Resilience – Macro Stress Tests

2.11 The liquidity coverage ratio (LCR) has been 2.12 Macro stress tests are performed to assess
comfortably above the regulatory minimum of 100 the resilience of SCBs’ balance sheets to unforeseen
per cent across bank groups. It is the highest in the shocks emanating from the macroeconomic
case of FBs (Chart 2.7 a). The net stable funding environment. The framework for macro stress
ratio (NSFR) has also remained above the regulatory testing has been revised from this issue of the FSR
minimum of 100 per cent across all bank groups. (Box 2.1). The macro stress tests attempt to project
The growth of ‘required stable funding’ for PSBs and capital ratios of banks under a baseline and two
PVBs between March 2024 and September 2024 has adverse macro scenarios over a one-and-half year
outpaced the growth of ‘available stable funding’ horizon, i.e., till end-March 2026 incorporating
during the same period, which has resulted in a credit risk, interest rate risk in the banking book
marginal decline in NSFR for these bank groups and market risk. The baseline scenario is derived
(Chart 2.7 b). from the forecasted path of macroeconomic
Chart 2.7: Liquidity Ratios

a. Liquidity Coverage ratio b. Net Stable Funding Ratio

Note: LCR of all SCBs including SFBs stands at 128.6 for Sep-24.

Sources: RBI supervisory returns and staff calculations.

67
Chapter II Financial Institutions: Soundness and Resilience

Box 2.1: Revised Macro Stress Testing Framework

The macro stress testing framework has been revamped Zi,t is the quarterly slippage ratio of bank i during

with the technical support of the International quarter t, Xt is a vector of macroeconomic variables
Monetary Fund (IMF, 2024). The salient features of the including lending spread and GDP growth,
revised framework are enlisted below: μ'i represents bank-specific fixed effects, λ'it
(i) Projection of internally consistent adverse macro- represents adjustments for specific quarters and e'i,t
financial scenarios based on scenario narratives is an i.i.d. error term. Subsequently, the estimates
and by performing simulations based on a vector of quarterly slippage ratios, ^ Z i,ts , are computed
autoregression model with exogenous variables based on first differences of the regression
(VARX). equation (2) as,

(ii) 
Projection of slippage ratio, interest income
and interest expense at bank level using panel …(3)
regression models. Projection of GNPAs: Bank-level GNPAs are
(ii) 
(iii) Incorporation of market risk in the solvency stress projected using the equation,
testing framework.
(iv) 
Scenario horizon of 1.5 - 2 years, generating ...(4)
projections of key financial ratios as at the end of
where represents the stock of GNPA of bank
the ensuing financial years.
i at the end of quarter t, , and
Macro-scenario design: The test envisages three are write-off, upgradation and recovery
scenarios - a baseline and two hypothetical adverse rates of bank i during the quarter respectively,
macro scenarios. While the baseline scenario is derived is the probability of default (slippage
from the forecasted path of macroeconomic variables, ratio) projected in (3) and is the stock of
the two adverse scenarios are hypothetical stringent performing loans at the end of quarter t-1.
stress scenarios derived by performing simulations
using the VARX model, Projection of performing loans: The stock of
(iii) 
performing loans for bank i at the end of quarter, t,
...(1) is projected as,
based on GDP growth, CPI inflation, repo rate and
lending spread as endogenous variables and US-GDP
... (5)
growth and US-VIX as exogeneous variables, as well as
by assuming hypothetical stress scenario narratives. Projection of provisions: Provisions of bank i for
(iv) 
quarter t are projected as follows,
Projection of key financial variables: Bank-wise
slippage ratio, interest income and interest expense ...(6)
are projected based on bank-level panel regression where provisioning coverage ratio (PCR) is assumed
models. GNPA ratios and provisions are projected using at 75 per cent, loss given default (LGD) during
structural models. Non-interest income comprising of quarter t is derived based on the model of Frye and
(a) fee income and (b) other operating income excluding Jacobs (2012),
fee income, and non-interest expenses are projected
based on assumed growth rates of these variables under ...(7)
each scenario.
and the parameter is derived as,
Projection of slippage ratios: The quarterly
(i) 
slippage ratios are projected using the following
....(8)
panel regression model;

PD* and LGD* are long-term average PDs and

...(2) LGDs and represents the cumulative normal
for t = 1, … , T and i = 1, … , N distribution function.
(Contd.)

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 Financial Stability Report December 2024

Projection of interest income and expenses:

(v)  (vii) Projection of net profit: Net profit is projected as,
Interest income (as share of interest-earning Net Profit = I nterest Income - Interest Expenses
assets) and interest expenses (as share of interest- + Non-interest income - Non-interest
bearing liabilities) are modelled as functions Expenses + Trading income - Loss
of macroeconomic variables (GDP growth and Provisions - Provisions for Income  Tax
call rate) and bank fixed effects with structure (viii) Projection of capital: Capital is projected as,
similar to equation (2). Bank-wise projections Capitalt+1 = Capitalt + Net Profit(t,t+1) + Other
of these ratios are applied to derive shocks to Comprehensive Income(t,t+1) - Dividend
yield on assets and cost of funds for each bank. Projection of Risk weighted assets (RWA):
(ix) 
These shocks are further applied on granular RWA-credit risk is projected as,
risk sensitive asset and risk sensitive liability  RWAt+1 = (RWAt - Reduction in RWA due to new
portfolio of each bank to assess interest rate provisions).(1+g/100)  +  Additional RWA
risk which comprises of, (i) interest rate risk due to new defaulted loans
due to changes in risk-free rates and (ii) interest  where g is the growth rate assumed to be at
rate risk due to changes in credit and funding nominal GDP growth rate. RWA-market risk and
spreads. RWA-operational risk are projected to grow at
assumed growth rates.
Projection of market risk: Market risk is estimated
(vi) 
by applying MTM revaluation of bond (AFS and Major assumptions: Provisions for income tax are
assumed at 30 per cent, 25 per cent and 35 per cent
HFT portfolio) exposures of banks using three
of profit before tax respectively for public sector banks
inputs, (1) bond exposure, (2) Macaulay duration, (PSBs), private banks (PVBs) and foreign banks (FBs),
and (3) interest rate shock, using the bond based on the data of previous years. Dividend payout
revaluation formula: ratio is assumed at 35 per cent of net profit. Balance
sheet is projected to grow at the rate of nominal GDP
...(9) growth.
References:
where D is the Macaulay duration, r is the risk-free
1. Frye and Jacobs (2012), “Credit Loss and Systematic
rate, s is credit spread component, Vt is the market Loss Given Default,” The Journal of Credit Risk.
value at time t , represents the risk-free rate 2. International Monetary Fund (2024). ‘India:
shift and the credit spread shift. Further, Technical Assistance Report-Review and Evaluation
equity and foreign exchange risks are also factored of the Reserve Bank of India’s Stress Test Model
into market risk. Framework’, November 01, 2024.

variables. The two adverse scenarios, as described monetary policy tightens and the spread between
below, are stringent conservative hypothetical policy rate and lending rate widens.
stress scenarios (Chart 2.8). The paths of the macro
(ii) Adverse Scenario 2: This scenario assumes
variables under the adverse scenarios are derived by
that global and idiosyncratic risk factors blend to
performing simulations that are based on a vector
trigger a synchronized sharp growth slowdown
autoregression model with exogenous variables
in key economies. Spillovers through trade and
(VARX).
financial channels as well as market fragmentation
(i) Adverse Scenario 1: This scenario assumes impact domestic GDP growth. The scenario further
persisting geopolitical risks and escalation of assumes that although the central bank eases
global financial market volatility. Due to supply monetary policy, incomplete monetary policy
chain disruptions percolating to commodity prices, transmission due to high uncertainty widens the
domestic inflation soars. Consequently, domestic spread between policy rate and lending rate.

69
Chapter II Financial Institutions: Soundness and Resilience

Chart 2.8: Macro Scenario Assumptions

a. GDP Growth Assumptions under Alternate Scenarios b. CPI Inflation Assumptions under Alternate Scenarios

Source: RBI staff calculations.

2.13 The stress test results reveal that the 2.14 The CET1 capital ratio of the select 46
aggregate CRAR of 46 major SCBs may fall from banks may marginally rise from 13.9 per cent in
16.6 per cent in September 2024 to 16.5 per cent by September 2024 to 14.1 per cent by March 2026
March 2026 under the baseline scenario and to 15.7 under the baseline scenario, but it may worsen
per cent under adverse scenario 2. No bank would to 13.2 per cent under adverse scenario 2. Under
fall short of the minimum capital requirement adverse scenario 1, the ratio may fall to 11.9 per
of 9 per cent under both the scenarios. However, cent and one bank may breach the minimum capital
under adverse scenario 1, SCBs’ aggregate CRAR requirement of 5.5 per cent, although none of the
may deplete to 14.3 per cent and four banks may banks would fail under the baseline scenario and
breach the minimum capital requirement of 9 per adverse scenario 2 (Chart 2.10).
cent (Chart 2.9).

Chart 2.9: CRAR Projections

a. System* Level CRAR b. Bank-wise Distribution of CRAR: March 2026

Note: * For a system of 46 select banks.

Source: RBI staff calculations.

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 Financial Stability Report December 2024

Chart 2.10: Projection of CET1 Capital Ratio

a. System* Level CET1 Ratio b. Bank-wise Distribution of CET1 Ratio: March 2026

Note: * For a system of 46 select banks.

Sources: RBI supervisory returns and staff calculations.

2.15 The aggregate GNPA ratio of the 46 banks scenario of a run of 25 per cent on customer deposits
may rise from 2.6 per cent in September 2024 to along with 75 per cent demand on unutilised
3.0 per cent in March 2026 under the baseline portion of committed credit lines. It is further
scenario and further to 5.0 per cent and 5.3 per assumed that banks try to meet the deposit run and
cent, respectively, under adverse scenario 1 and demand from committed credit lines by using cash
adverse scenario 2. Credit risk is comparatively and cash equivalents first, followed by liquidation
severe under adverse scenario 2; the GNPA ratios of of held for trading (HFT) and available for sale (AFS)
PSBs may rise from 3.3 per cent in September 2024 securities; and if the liquidity shortfall persists
to 7.3 per cent in March 2026, whereas it may go up further, they resort to pledging of held for maturity
from 1.9 per cent to 2.9 per cent for PVBs and from (HTM) securities with the RBI. When banks avail
0.9 per cent to 1.4 per cent for FBs (Chart 2.11). central bank funding (CBF), the capital impact is
2.16 The impact of liquidity risk on the solvency estimated on the basis of the increased funding
of SCBs has been simulated under the hypothetical costs at the marginal standing facility (MSF) rate.

Chart 2.11: Projection of SCBs’ GNPA Ratios

Sources: RBI supervisory returns and staff calculations.

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Chapter II Financial Institutions: Soundness and Resilience

The results show that under this assumed liquidity two SD in a quarter. Under a severe shock of two
risk scenario, the CRAR of SCBs would reduce by SD during Q2:2024-25: (a) the aggregate GNPA ratio
additional 80-90 bps by March 2026, owing to of 46 select SCBs moves up from 2.6 per cent to 8.0
expenses related to the use of CBF (Chart 2.12). per cent; (b) the system-level CRAR depletes by 350
II.1.8 Sensitivity Analysis11 bps from 16.6 per cent to 13.1 per cent; and (c) the
CET1 ratio declines from 13.9 per cent to 10.3 per
2.17 In case of macro stress tests, the shocks are
cent, but both CRAR and CET1 ratio remain well
in terms of adverse macroeconomic conditions,
above the respective regulatory minimum levels.
while in sensitivity analyses, shocks are applied
The system level capital impairment could be 22.7
to single factors like GNPA, interest rate, equity
per cent in this case (Chart 2.13 a). The reverse
prices, deposits, and the like, one at a time. This
stress test shows that a shock of 4.4 SD would
sub-section presents the results of top-down
be required to bring down the system-level CRAR
sensitivity analyses involving several single-factor
below the regulatory minimum of 9 per cent. A
shocks to assess the vulnerabilities of SCBs to
shock of 6.3 SD would be required to bring down
simulated credit, interest rate, equity and liquidity
the system-level CET1 ratio below the prescribed
risks under various stress scenarios12.
regulatory minimum of 5.5 per cent.
a. Credit Risk
2.19 Bank-level stress tests indicate that under
2.18 Credit risk sensitivity has been analysed the severe (two SD) shock scenario, seven banks
under two scenarios wherein the system level with a share of 11.8 per cent of SCBs’ total assets
GNPA ratio is assumed to rise from its prevailing may fail to maintain the regulatory minimum level
level by (i) one standard deviation (SD)13; and (ii) of CRAR (Chart 2.13 b). In such a scenario, the CRAR
would fall below 7 per cent in the case of three
Chart 2.12: Impact of Liquidity Risk on Solvency
banks (Chart 2.13 c) and six banks would record
a decline of over eight percentage points in the
CRAR. In general, PVBs and FBs would face lower
erosion in CRARs than PSBs under both scenarios
(Chart 2.13 d).

b. Credit Concentration Risk

2.20 Stress tests on banks’ credit concentration

– considering top individual borrowers according
to their standard exposures – show that in the
extreme scenario of the top three individual
Sources: RBI supervisory returns and staff calculations. borrowers of respective banks failing to repay14,

11
Detailed methodology is provided in Annex 2.
12
Macro stress test and single factor sensitivity analyses are conducted for a sample of 46 SCBs accounting for 98 per cent of the total assets of the
banking sector, excluding RRBs and cooperative banks. From this round, the sample of 46 banks for stress test/ sensitivity analysis has been updated.
The sample now includes 12 PSBs, 21 PVBs and 13 FBs. The shocks designed under various hypothetical scenarios are extreme but plausible.
13
The SD of the GNPA ratio is estimated by using quarterly data for the last 10 years.
14
In the case of default, the borrower in the standard category is considered to move to the sub-standard category.

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 Financial Stability Report December 2024

Chart 2.13: Credit Risk - Shocks and Outcomes

a. System Level b. Bank Level

c. Distribution of CRAR of banks d. Range of Shifts in CRAR

Note: For a system of select 46 SCBs.

Shock 1: 1 SD shock on GNPA ratio.
Shock 2: 2 SD shock on GNPA ratio.
Sources: RBI supervisory returns and staff calculations.

no bank would face a situation of a drop in CRAR (Chart 2.14 a). In this extreme stress case, four
below the regulatory minimum of 9 per cent banks would experience a fall of more than two

Chart 2.14: Credit Concentration Risk: Individual Borrowers – Exposure (Contd.)

a. Distribution of CRAR

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.14: Credit Concentration Risk: Individual Borrowers – Exposure (Concld.)

b. Range of Shifts in CRAR c. System Level Ratios

Note: For a system of select 46 SCBs.

Shock 1: The top 1 group borrower fails to meet payment commitments.
Shock 2: The top 2 group borrowers fail to meet payment commitments.
Shock 3: The top 3 group borrowers fail to meet payment commitments.
Sources: RBI supervisory returns and staff calculations.

percentage points in their CRARs (Chart 2.14 b) face a CRAR decline of over two percentage points
and the system level CRAR would fall by 90 bps (Chart 2.15 a, b and c).
(Chart 2.14 c).
2.22 In the extreme scenario of the top three
2.21 Under the extreme scenario of the top three individual stressed borrowers of respective
group borrowers in the standard category failing to banks failing to repay16, all the banks would
repay15, the system level CRAR would decline by remain resilient (Chart 2.16 a). For the majority
130 bps but the ratio for all banks would remain of the banks, the CRAR would deplete by 25
above the regulatory minimum. Five banks would bps or less (Chart 2.16 b). Under this scenario,

Chart 2.15: Credit Concentration Risk: Group Borrowers – Exposure (Contd.)

a. Distribution of CRAR

15
In the case of default, the group borrower in the standard category is considered to move to the sub-standard category.
16
In case of failure, the borrower in sub-standard or restructured category is considered to move to the loss category.

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 Financial Stability Report December 2024

Chart 2.15: Credit Concentration Risk: Group Borrowers – Exposure (Concld.)

b. Range of Shifts in CRAR c. System Level Ratios

Note: For a system of select 46 SCBs.

Shock 1: The top 1 group borrower fails to meet payment commitments.
Shock 2: The top 2 group borrowers fail to meet payment commitments.
Shock 3: The top 3 group borrowers fail to meet payment commitments.
Sources: RBI supervisory returns and staff calculations.

the system level CRAR would decline by 20 bps Table 2.1:Decline in System Level CRAR
(basis points, in descending order for top 10 most sensitive sectors)
(Chart 2.16 c).
1 SD 2 SD
c. Sectoral Credit Risk Basic Metal and Metal Products (1048 per cent) 9 17
Infrastructure - Energy (615 per cent) 6 12
2.23 Shocks applied on the basis of volatility Infrastructure - Transport (145 per cent) 3 6
All Engineering (220 per cent) 2 5
of industry sub-sector-wise GNPA ratios indicate
Textiles (121 per cent) 2 4
varying magnitudes of impact. By and large, Vehicles, Vehicle Parts and Transport Equipments 1 2
(673 per cent)
sectoral credit risk remains muted - a two SD
Construction (111 per cent) 1 2
shock to basic metals and energy sub-sectors Food Processing (66 per cent) 1 2
would reduce the system-level CRAR by 17 bps Chemicals (222 per cent) 1 2
Gems and Jewellery (121 per cent) 1 1
and 12 bps, respectively, whereas the impacts of
Notes: (1) For a system of select 46 SCBs.
shocks on the rest of the sub-sectors are negligible (2) Numbers in parentheses represent the growth in GNPA of that
sub-sector due to 1 SD shock to the sub-sector’s GNPA ratio.
(Table 2.1). Sources: RBI supervisory returns and staff calculations.

Chart 2.16: Credit Concentration Risk: Individual Borrowers – Stressed Advances (Contd.)

a. Distribution of CRAR

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.16: Credit Concentration Risk: Individual Borrowers – Stressed Advances (Concld.)

b. Range of Shifts in CRAR c. System Level Ratios

Note: For a system of select 46 SCBs.

Shock 1: The top 1 group borrower fails to meet payment commitments
Shock 2: The top 2 group borrowers fail to meet payment commitments
Shock 3: The top 3 group borrowers fail to meet payment commitments.
Sources: RBI supervisory returns and staff calculations.

d. Interest Rate Risk17 18 the share of the AFS portfolio (from 89.3 per cent in
March 2024) is mainly attributable to the framework
2.24 A revised framework for classification,
revision. The clearly identifiable trading book (viz.,
valuation and operation of SCBs’ investment
the HFT category) accounts for 93.2 per cent of
portfolios was introduced by the Reserve Bank19
the FVTPL portfolio. PSBs’ share in the fair-valued
with effect from April 1, 2024 under which the
investment portfolio of SCBs has declined to reach
classification and operation norms for investments
a low of 37.2 per cent in September 2024, while the
are principally aligned with global financial
share of PVBs has increased to nearly one-third.
reporting standards. Major changes include the
removal of ceiling on held to maturity (HTM) book, Chart 2.17: AFS and FVTPL (including HFT) Portfolios:
Bank-group wise
a clearly identifiable trading book, introduction of
fair value hierarchy for investments and symmetric
treatment of fair value gains and losses.

2.25 For the sample of SCBs under assessment,

the market value of investments subject to fair
value has been on the rise and stood at ₹23.3 lakh
crore in September 2024. Out of this, 68.2 per cent
was in the available for sale (AFS) category and the
remaining amount in the fair value through profit
and loss (FVTPL) category, which includes the held
for trading (HFT) portfolio (Chart 2.17). The fall in Sources: Individual bank submissions and staff calculations.

17
Prior period consistency and comparability may be limited as historical data has not been recast using the updated accounting standards.
18
The analysis in this portion is restricted to investments in India by the domestic operations of SCBs. For HTM, AFS and FVTPL (including HFT)
portfolios, only interest rate related instruments and for “Investment in Subsidiaries, Associates and Joint Ventures” both interest and non-interest
related investments are taken into account.
19
“Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions)” dated September 12, 2023.

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 Financial Stability Report December 2024

2.26 The sensitivity (PV0120) of the AFS portfolio Table 2.3: Interest Rate Risk – Bank-groups - Shocks and Impacts
(under shock of 250 basis points parallel upward shift
decreased in September 2024 relative to March of the INR yield curve)

2024, predominantly on account of shrinkage in PSBs PVBs FBs All SCBs

FVTPL FVTPL FVTPL FVTPL
the size of the AFS portfolio. The modified duration AFS (incl. AFS (incl. AFS (incl. AFS (incl.
HFT) HFT) HFT) HFT)
of PSBs’ and PVBs’ AFS portfolios rose, whilst it Modified 2.9 3.4 1.9 3.7 2.2 8.7 2.4 5.7
Duration
declined for FBs. (year)
Share in total 18.3 3.7 21.2 12.0 48.3 40.8 22.6 10.5
2.27 The PV01 of FVTPL (including HFT) portfolios Investments
(per cent)
of all banking cohorts increased because of the
Reduction in
77 60 605 114
significant increase in market value of securities CRAR (bps)
Reduction in
held in the portfolio (Table 2.2). Additionally, the CET1 (bps) 78 61 608 115

modified duration of the FVTPL portfolio of PVBs Note: Share of total investments has been computed excluding
investment in associates, subsidiaries and Joint Ventures (JVs).
and FBs rose by 50 per cent, while it declined Sources: Individual bank submissions and staff calculations.
marginally for PSBs.
lower than that announced in the interim budget in
2.28 It is assessed that the impact of a parallel February 2024 - the adherence to the glide path of
upward shift of 250 bps in the yield curve on the fiscal consolidation generated positive sentiments.
fair-valued portfolio (AFS and FVTPL) would reduce The shorter end of the yield curve eased on account
the system level CRAR and CET1 ratio by 114 and of the announcement in the Union Budget of
115 bps, respectively (Table 2.3). At a disaggregated reduction of T-bills borrowing by ₹1 lakh crore,
level, four foreign banks’ CRAR will fall below the easing of US treasury yields and increased demand
regulatory minimum of 9 per cent in the event of by FPIs across the curve. Yields have trended up
such a major shock. since end-September, 2024 on account of the
2.29 As of September 2024, yields have decreased negative sentiment caused by acceleration of
across the curve from their levels prevailing in domestic retail inflation (Chart 2.18).
March 2024. This is because the Government
2.30 The updated accounting guidelines require
borrowing programme (gross and net) for 2024-25
symmetrical treatment of fair value gains/losses for
announced in the Union Budget in July 2024 was
AFS and FVTPL portfolios, wherein both mark to
Table 2.2: PV01 of AFS and FVTPL (including HFT) Portfolios market (MTM) gains and losses will be recognised
(in ₹crore) in the books. The unrealised MTM gains/losses
AFS Portfolio FVTPL (including HFT)
Portfolio
from performing investments in the AFS portfolio
Mar-24 Sep-24 Mar-24 Sep-24 will be routed through the newly constituted
PSBs 231.4 209.1 4.4 48.5 “AFS-Reserve”. This would be considered as
PVBs 93.2 93.6 26.3 101.6 common equity tier 1 (CET1) capital subject to
FBs 215.4 82.7 68.5 275.3
certain conditions. Similarly, MTM gains/losses
Note: FVTPL (including HFT) data for March 2024 pertains to HFT
portfolio as per the earlier accounting norms. in the FVTPL portfolio will be reported through
Sources: Individual bank submissions and staff calculations.
the profit and loss (P&L) account, which is in

20
PV01 is a measure of sensitivity of the absolute value of the portfolio to a one basis point change in the interest rate.

77
Chapter II Financial Institutions: Soundness and Resilience

Chart 2.18: Yield Curves and Shift in Yields across Tenors Chart 2.19: HTM Portfolio – Composition
since March 2024 (updated till December 12, 2024)

Note: Prior to April 1, 2024 corporate securities were not eligible to be included
Source: FBIL. in HTM book.
Sources: Individual bank submissions and staff calculations.

contrast to previous standards which overlooked

MTM appreciation while accounting for MTM of standard assets in the HTM book has increased
depreciation in the P&L statement. the share of ‘others’ category for foreign banks - it
forms nearly a third of their HTM book. Corporate
2.31 Trading profits increased on an annual basis
bonds, which are eligible to be included in HTM
(y-o-y) for all bank cohorts in Q2:2024-25, but on books beginning April 1, 2024, accounted for 2.2
a sequential (q-o-q) basis, they increased for PSBs per cent of SCBs’ HTM holdings as of September
and FBs. Securities trading earnings contributed 30, 2024.
to more than a third of FBs’ net operating
2.33 In September 2024, the notional MTM losses
income and were much lower for PSBs and PVBs
in the HTM books of SCBs (PSBs and PVBs) turned
(Table 2.4).
a corner, with a notional gain of ₹40,187 crore from
2.32 PSBs increased their holdings in government a notional loss of ₹34,024 crore in March 2024, as
securities (G-secs) and state development loans the yield curve shifted down in H1:2024-25. The
(SDLs) as compared to other HTM-eligible securities notional gains were predominantly concentrated
(Chart 2.19). PVBs reduced their holding of G-secs among the larger banks. Nine banks (PSBs + PVBs)
in the HTM category while increasing their holding continue, however, to have notional MTM losses in
of SDLs. The inclusion of pass-through certificates their HTM book.

2.34 The distribution of unrealised gains across

Table 2.4: Other Operating Income - Profit/ (Loss) on
Securities Trading – All Banks investment categories suggests that PVBs have the
(in ₹crore) largest proportion of gains in their G-sec books,
Q2: Q3: Q4: Q1: Q2: while PSBs have the largest proportion of their
2023-24 2023-24 2023-24 2024-25 2024-25
PSBs 3,914 (6.9) 3,187 (6.4) 7,565 (10.7) 4,883 (7.5) 9,134 (12.6)
gains in their SDL books. PSBs have MTM gains
PVBs 872 (1.4) 3,628 (5.4) 10,459 (13.7) 4,960 (6.6) 3,803 (5.1) in all categories of their HTM books. The loss in
FBs -617 (-5.2) -1,864 (-19.6) 1,546 (17.6) 968 (8.0) 4,363 (33.7) the corporate securities portfolio of PVBs is due to
Note: Figures in parentheses represent other operating income (OOI)-Profit/ (Loss) lower grade corporate bonds held in the HTM book
on securities trading as a percentage of net operating income.
Source: RBI supervisory returns. (Chart 2.20).

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 Financial Stability Report December 2024

Chart 2.20: HTM Portfolio – Unrealised Gain/ Loss as on This portfolio is predominated by the equity
September 30, 2024
portfolio and has large unrealised gains, which
could provide strength to the balance sheet during
periods of stress, but its valuation is subject to
market risk.
2.38 An assessment of the interest rate risk of
banks21 using traditional gap analysis (TGA) for rate
sensitive global assets, liabilities and off-balance
sheet items estimates that for a 200 bps increase
in interest rate, the earnings at risk (EAR) for time
buckets up to one year is 11.7 per cent and 11.3
per cent of NII for PSBs and PVBs, respectively.
Sources: Individual bank submissions and staff calculations.
The impact would be minimal for FBs and SFBs
2.35 If a parallel upward shock of 250 bps in the (Table 2.5). The impact of an interest rate rise on
yield curve is applied, the MTM impact on the HTM earnings would be positive as the cumulative gap22
portfolio of banks excluding unrealised gains/losses at bank group level was positive in September 2024.
would reduce the system level CRAR by 318 bps but Conversely, if the interest rates would decrease,
no bank would see a reduction in CRAR and CET-I they would lead to an adverse impact.
ratio below the respective regulatory minimums. 2.39 As per the duration gap analysis23 (DGA) of
2.36 The new guidelines do not place any ceiling rate sensitive global assets, liabilities and off-balance
on investments that can be made under the HTM sheet items, the market value of equity (MVE) for
category, unlike the previous guidelines which PVBs, FBs and SFBs would reduce from an upward
limited HTM holdings of banks. However, the new movement in the interest rate, while that of PSBs
guidelines have not resulted in any substantial would be positively impacted. The MVE of SFBs
increase in the holding of statutory liquidity ratio would be particularly weighed down by an interest
(SLR) eligible securities in HTM books of PSBs and rate rise (Table 2.6). If the interest rates decrease,
PVBs, which amounted to 22.9 per cent and 18.5 the impact would be in the opposite direction.
per cent of their net demand and time liabilities
Table 2.5: Earnings at Risk (EAR) - Traditional Gap Analysis (TGA)
(NDTL), respectively, while it stood at 4.6 per cent Earnings at Risk (till one year) as percentage of Net
Bank
for FBs. Group
Interest Income (NII)
100 bps increase 200 bps increase
2.37 The revised framework has established PSBs 5.9 11.7
a new category for classification of investments PVBs 5.7 11.3
viz., ‘Investments in Subsidiaries, Associates FBs 0.5 0.9
and Joint Ventures’ separate from the other SFBs 0.9 1.8

investment categories (viz., HTM, AFS and FVTPL). Sources: RBI supervisory returns and staff calculations.

21
In terms of circular on “Guidelines on Banks’ Asset Liability Management Framework – Interest Rate Risk” dated November 04, 2010.
22
Gap refers to rate sensitive assets (RSA) minus rate sensitive liabilities (RSL). Advances, investments, swaps/ forex swaps, and reverse repos are major
contributors to RSA whereas deposits, swaps/ forex swaps and repos are observed to be the main elements under RSL.
23
The DGA involves bucketing of all RSA and RSL as per residual maturity/ re-pricing dates in various time bands and computing the Modified Duration
Gap (MDG).

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Chapter II Financial Institutions: Soundness and Resilience

Table 2.6: Market Value of Equity (MVE)- Chart 2.21: Equity Price Risk
Duration Gap Analysis (DGA)
Bank Market Value of Equity (MVE) as percentage of Equity
Group 100 bps increase 200 bps increase
PSBs 0.3 0.5
PVBs -1.1 -2.2
FBs -3.7 -7.3
SFBs -5.8 -11.6
Sources: RBI supervisory returns and staff calculations.

e. Equity Price Risk

2.40 As banks have limited direct capital market
exposures owing to regulatory prescriptions, any
impact of a possible significant fall in equity prices
on banks’ CRAR would be low for the system of 46 Note: For a system of select 46 SCBs.
Shock 1: Equity prices drop by 25 per cent.
banks. Under scenarios of 25 per cent, 35 per cent Shock 2: Equity prices drop by 35 per cent.
Shock 3: Equity prices drop by 55 per cent.
and 55 per cent drop in equity prices, the system Sources: RBI supervisory returns and staff calculations.
level CRAR would reduce by 26 bps, 37 bps and 58
bps, respectively (Chart 2.21).
increased demand for unutilised portions of
f. Liquidity Risk sanctioned / committed / guaranteed credit lines.
2.41 Liquidity risk analysis aims to capture The methodology for the liquidity stress test has
the impact of any possible run on deposits and been updated (Box 2.2).

Box 2.2: Revamped Liquidity Stress Test of SCBs based on LCR Framework
In 2010, the Basel Committee on Banking Supervision to each of these components (RBI, 2014). The baseline
(BCBS) introduced two key minimum standards for scenario for the stress test applies weights to each
funding liquidity: the liquidity coverage ratio (LCR) component, similar to that used for LCR computation.
and the net stable funding ratio (NSFR) (BCBS, 2010). The adverse scenarios are designed by applying higher
The LCR [viz., the ratio of high quality liquid assets weights (run-off rates) to certain cash outflows than
(HQLA) holdings to total net cash outflows over the the baseline (Table 1).
next 30 calendar days] aims to enhance banks' short- The LCR-based liquidity stress test has been performed
term resilience by ensuring that they hold enough for a sample of 46 major SCBs, based on the data
HQLAs to withstand a 30-day stress scenario. The submitted by banks for the September 2024 quarter.
NSFR, on the other hand, focuses on long-term stability The results show that the aggregate LCR of 46 SCBs may
by requiring banks to finance their operations with reduce from 128.0 per cent in the baseline scenario
more reliable and stable funding sources. Since 2019, to 120.9 per cent in stress scenario 1 and further to
Indian banks are required to maintain a minimum 114.8 per cent in stress scenario 2. No bank would
LCR of 100 per cent on a continuous basis, although fail to maintain LCR above the minimum requirement
certain temporary relaxations were provided during of 100 per cent in stress scenario 1, while two banks
the COVID-19 pandemic. would fail to meet minimum regulatory LCR in stress
scenario 2 (Chart 1a).
The LCR is computed on the basis of granular data on
HQLA as well as expected cash inflows and outflows The median LCRs of these banks decreases from 130.3
over the next 30 days, by applying appropriate weights per cent in the baseline to 123.2 per cent under stress
(Contd.)

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 Financial Stability Report December 2024

Table 1: Run-off Factors applied on Cash Outflow Components

(per cent)
Cash Outflow Components Baseline Stress Stress
Scenario 1 Scenario 2
Retail Deposits
Stable deposits 5 6 7
Less stable retail deposits 10 11 12
Unsecured Wholesale Funding
Demand and term deposits, residual maturity < 30 days, small business
Stable deposits 5 6 7
Less stable deposits 10 11 12
Non-financial corporates, sovereigns, central banks, multilateral development banks, PSEs 40 42.5 45
Currently undrawn but committed credit and liquidity facilities
Retail and small business 5 10 12
Non-financial corporates, sovereigns, central banks, multilateral development banks, PSEs
Credit facilities 10 12 15
Liquidity facilities 30 40 50

scenario 1, and further to 117.1 per cent under stress liquidity stress on PSBs is the highest (decline of 14.5
scenario 2 (Chart 1b). percentage points under stress scenario 2) among bank
Foreign banks (FBs) have the highest LCR among bank groups (Chart 2).
groups under all the three scenarios. The impact of
Chart 2: Bank Group-wise LCR under alternate Scenarios
Chart 1: LCR-based Liquidity Stress Test
a. Liquidity Stress Test: Results

Source: RBI staff calculations.

b. Distribution of Bank-level LCR

References:

1. Basel Committee on Banking Supervision. (2010).

Basel III: International framework for liquidity
risk measurement, standards and monitoring.
Basel: Bank for International Settlements.

2. Reserve Bank of India (2014). Basel III Framework

on Liquidity Standards – Liquidity Coverage Ratio
(LCR), Liquidity Risk Monitoring Tools and LCR
Disclosure Standards, June 09, 2014.
RBI / 2013-14 / 635 DBOD.BP.BC.No.120 / 21.04.098 /
Source: RBI staff calculations. 2013-14.

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Chapter II Financial Institutions: Soundness and Resilience

II.1.9 Bottom-up Stress Tests: Derivatives Chart 2.22: MTM Position of Total Derivatives Portfolio of
Select Banks – September 2024
Portfolio
2.42 A series of bottom-up stress tests (sensitivity
analyses) on derivatives portfolios have been
conducted for select banks24 with the reference date
of end-September 2024. The derivatives portfolios of
the banks in the sample are subjected to four separate
shocks on interest rates and foreign exchange rates.
While the interest rate shocks range from 100 to 250
basis points, in the case of foreign exchange rates,
shocks of 20 per cent appreciation/depreciation
are assumed. The stress tests are carried out for
Note: PSB: Public sector bank, PVB: Private sector bank, FB: Foreign bank.
individual shocks on a stand-alone basis. Source: Sample banks (bottom-up stress tests on derivatives portfolio).

2.43 Keeping parity with the trend observed interest rate rise and lose from an interest rate
in the recent past, most of the FBs maintained fall (Chart 2.23). As regards exposures to forex
a significantly negative net MTM position as a derivatives, banks stand to benefit more from INR
proportion to CET1 capital in September 2024. The depreciation in September 2024 than in March 2024;
MTM impact is, by and large, muted for PSBs and also, their potential losses from INR appreciation
PVBs (Chart 2.22). For the overall system, the extent get reduced.
of negative MTM position increased in the half-year
2.45 The income from the derivatives portfolios
ending September 2024.
includes changes in net MTM positions and the
2.44 The stress test results show that the select realised income. The contribution of the derivatives
set of banks would, on an average, gain from an portfolio of FBs to their net operating income (NOI)

Chart 2.23: Impact of Shocks on Derivatives Portfolios of Select Banks

(change in net MTM position on application of a shock)

Note: Change in net MTM due to an applied shock is with respect to the baseline.
Source: Sample banks (bottom-up stress tests on derivatives portfolio).

24
Stress tests on derivatives portfolios were conducted by a sample of 25 banks, constituting the major active authorised dealers and interest rate swap
counterparties. Details of test scenarios are given in Annex 2.

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 Financial Stability Report December 2024

hit a low in March 2024 and then turned negative robust, with their combined CRAR rising to 17.5
in September 2024. A possible reason for the same per cent in September 2024. This improvement
may be that their realised income was unable to has been mainly due to Tier 127 institutions
compensate for the decrease in their net MTM (Chart 2.25 b and c).
positions (net MTM positions of most FBs turned 2.48 The GNPA and NNPA ratios of UCBs
more negative). For PSBs and PVBs, the contribution increased in September 2024 from March 2024,
declined marginally in September 2024 as but have remained below September 2023 levels
compared to March 2024, although income from (Chart 2.25 d and e). The provisioning coverage
the derivatives portfolios witnessed an uptick in ratio (PCR), which showed improvement in March
the case of PSBs (Chart 2.24). Based on the notional 2024, has decreased to 67.5 per cent in September
principal amount, FBs have more diversified 2024 (Chart 2.25 f). GNPA ratios of large borrowers,
counterparties while most of the positions taken which accounted for 23.8 per cent of UCBs’ loan
by PVBs and PSBs are with other banks. book, followed similar movements as the overall
II.2 Primary (Urban) Cooperative Banks 25 GNPA ratio (Chart 2.25 g). Improvement in asset
quality was witnessed across all tiers, except the
2.46 Credit by primary urban cooperative banks
smallest one (Tier 1), in September 2024 from a
(UCBs) recorded a growth of 7.4 per cent (y-o-y)26 in
year ago (Chart 2.25 h).
September 2024. Both scheduled UCBs (SUCBs) and
non-scheduled UCBs (NSUCBs) recorded increases 2.49 UCBs’ profitability ratios went up in
in growth (Chart 2.25 a). September 2024 from March 2024, despite a broad-
based moderation of the net interest margin (NIM).
2.47 The capital position of UCBs has remained
However, these ratios declined in H1:2024-25
Chart 2.24: Income from the Derivatives Portfolio
from a year ago (Chart 2.25 i, j and k). Compared
to September 2023, both RoA and RoE decreased
in September 2024 for all tiers, except for Tier 1
(Chart 2.25 l).

II.2.1 Stress Testing

2.50 Stress tests were conducted on a select set

of UCBs28 to assess credit risk (default risk and
concentration risk), market risk (interest rate risk
in trading book and banking book) and liquidity
risk, based on their financial positions reported for
Source: Sample banks (bottom-up stress tests on derivatives portfolio). September 2024.

25
Data are provisional and based on off-site surveillance (OSS) returns.
26
Based on common sample of 1438 UCBs covering over 90 per cent of gross loans extended by UCBs.
27
Revised Regulatory Framework for Urban Co-operative Banks (UCBs) – Net Worth and Capital Adequacy (Circular DOR.CAP.REC.No.86/09.18.201/2022-
23 dated December 01, 2022 and DOR.CAP.REC. No.109/09.18.201/2022-23 dated March 28, 2023).
28
The stress test is conducted with reference to the financial position of September 2024 for select 197 UCBs with asset size of more than ₹500 crore,
excluding banks under the Reserve Bank’s All Inclusive Directions (AID). These 197 UCBs together cover 69 per cent of the total assets of the UCB sector.
The detailed methodology used for stress test is given in Annex 2.

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.25: Credit Profile and Asset Quality Indicators of UCBs (Contd.)

a. Credit Growth (y-o-y) b. CRAR

c. Tier-wise CRAR d. GNPA Ratio

e. NNPA Ratio f. Provisioning Coverage Ratio

g. GNPA of Large Borrowers h. Tier-wise Asset Quality

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 Financial Stability Report December 2024

Chart 2.25: Credit Profile and Asset Quality Indicators of UCBs (Concld.)

i. NIM (annualised) j. RoA (annualised)

k. RoE (annualised) l. Tier-wise Profitability (annualised)

Sources: RBI supervisory returns and staff calculations.

2.51 All banks in the Tier 4 UCB sample - the resilience under stress scenarios for all the tested
largest category of UCBs with deposits above risk factors (Chart 2.26).
₹10,000 crore - would be able to meet the minimum
2.52 Under the severe stress scenario of credit
regulatory requirement29 of 10 per cent CRAR even
default risk, credit concentration risk and interest
under a severe stress scenario for credit default
rate risk in the trading book, the system level
risk. Under a severe stress scenario for credit
CRAR would reduce from the pre-shock position
concentration risk, however, one Tier 4 UCB would
of 16.9 per cent to 14.9 per cent, 13.5 per cent
fail. In case of liquidity risk, two UCBs in the Tier
4 category will face a liquidity mismatch of more and 15.5 per cent, respectively. A severe interest
than 20 per cent in 1-28 days maturity bucket under rate shock in the banking book would dent the
the severe stress scenario. For Tier 2 and Tier 3 system level net interest income (NII) by 6.9 per
UCBs, the impact of credit default risk and credit cent. At the aggregate level, there would be no
concentration risk under the severe stress scenario liquidity mismatch in 1-28 days time bucket under
is significant. The smallest UCBs (Tier 1) show the severe stress scenario.

29
The regulatory minimum CRAR for Tier 1 UCBs is 9 per cent and for the UCBs in Tiers 2 to 4 is 10 per cent. Further, UCBs in Tiers 2 to 4 shall achieve
the CRAR of at least 11 per cent by March 31, 2025, and 12 per cent by March 31, 2026.

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.26: Stress Test of UCBs

a. Credit Default Risk b. Credit Concentration Risk

* No. of UCBs where CRAR is declining below regulatory minimum * No. of UCBs where CRAR is declining below regulatory minimum

c. Market Risk (Interest Rate Risk in Trading Book) d. Market Risk (Interest Rate Risk in Banking Book)

* No. of UCBs where NII is declining by more than 20 per cent under Market
* No. of UCBs where CRAR is declining below regulatory minimum Risk (Interest Rate Risk in Banking Book)

e. Liquidity Risk

* No. of UCBs where liquidity mismatch is more than 20 per cent in 1-28 days’ time bucket

Notes: Figures in brackets represent sample size of the Tier.

Sources: RBI supervisory returns and staff calculations.

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 Financial Stability Report December 2024

II.3 Non-Banking Financial Companies (NBFCs)30 Bank in November 2023. This impact was especially
2.53 NBFCs have been categorised into four pronounced for NBFC-UL, comprising mostly of
layers - Base Layer (6.0 per cent31); Middle Layer NBFC-ICCs whose portfolios are dominated by
(71.2 per cent); Upper Layer (22.8 per cent); and Top retail lending (Chart 2.27 a).
Layer - with effect from October 1, 2022. The focus 2.55 In September 2024, credit growth for the
in this section is on NBFCs in the upper layer and largest category of NBFCs, viz., investment and
the middle layer (excluding CICs, HFCs and SPDs). credit companies (NBFC-ICCs), remained strong.
2.54 The credit growth of NBFCs slowed down to The second largest category of NBFCs (viz., NBFC-
16.0 per cent from 22.1 per cent a year ago, due to IFCs) continued to slow down further in H1: 2024-
the high base effect and the increased risk weight 25 and recorded low single digit credit growth
for consumer lending prescribed by the Reserve (Chart 2.27 b). Advances by HFCs in the upper

Chart 2.27: Credit Profile of NBFCs

a. Credit Growth (y-o-y) b. Activity-based Credit Growth of NBFCs (y-o-y)

Note: Figures in parenthesis of legend represent shares in outstanding loans Note: Figures in parenthesis of legend represent shares in outstanding loans
in Sep-24. in Sep-24, residual share pertains to NBFC-Factor.

c. Credit Growth of Select Sectors (y-o-y)

Note: Figures in bracket represent shares in outstanding loans of respective layer in Sep-24.

Sources: RBI supervisory returns and staff calculations.

30
The analyses done in this section are based on the provisional data available for NBFCs in upper layer and middle layer (excluding CICs, HFCs and
SPDs) as of November 25, 2024. Prior period consistency and comparability may be limited as NBFC data has been reclassified based on scale-based
regulation. The effect of mergers and reclassifications, if any, has not been considered for recasting historical data.
31
Numbers in parentheses represent the share of respective layer in NBFCs' overall assets as of March 31, 2024.

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Chapter II Financial Institutions: Soundness and Resilience

layer have grown by 11.6 per cent (y-o-y) as of end- Chart 2.29: GNPA Ratio

September 202432.

2.56 For NBFC-UL, credit growth decelerated

across all major sectors other than industry during
H1:2024-25. The pace of credit expansion by NBFC-
ML also moderated but remained positive across
major sectors (Chart 2.27 c).

2.57 Credit growth in the unsecured personal

loan segment has slowed down significantly since
September 2023. Similarly, the growth rate of
Sources: RBI supervisory returns and staff calculations.
microfinance/SHG loans within the retail advances
category has decreased by more than two-thirds
in the recent year. Gold loans have clocked rapid UL (Chart 2.30). GNPA ratio of Government owned
growth in the period ending September 2024 as NBFCs (55.4 per cent share in advances by NBFC-
compared to a year ago (Chart 2.28). ML) improved to 2.0 per cent while that of privately
owned NBFCs of NBFC-ML stood at 5.3 per cent in
2.58 Delinquency level in NBFC-UL edged up
September 2024.
marginally from March 2024, while they improved
for NBFC-ML in September 2024 (Chart 2.29). PCR 2.59 The system level CRAR of NBFCs was

of NBFC-ML remained higher than that of NBFC-

Chart 2.28: Growth and Delinquency of Components of Retail Loans

Note: Figure in parenthesis represents share of respective category of loans within retail sector at the end of each period. Residual share represents
small loan categories like (i) advances against fixed deposits and (ii) advances to individuals against shares, bonds, etc.
Sources: RBI supervisory returns and staff calculations.

32
Growth rate is based on the common sample of HFCs in Sep-23 and Sep-24.

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 Financial Stability Report December 2024

Chart 2.30: Provision Coverage Ratio 2.60 On the liquidity front, upper layer NBFCs
were more vulnerable, given that they had a higher
proportion of short-term liabilities to total assets in
comparison with NBFC-ML. The share of long-term
assets in total assets of NBFC-UL stood at 56.5 per
cent as against nearly two-thirds for NBFC-ML. This
share is higher for NBFC-ML as this layer includes
NBFC-IFCs, which account for half of NBFC-ML's
gross loans and predominantly lend for longer term
projects (Chart 2.32).

2.61 The reliance of NBFC-UL on bank borrowings

Sources: RBI supervisory returns and staff calculations.
and public deposits was higher than NBFC-ML.
healthy at 26.1 per cent in September 2024. CRAR 97 per cent of the funds sourced from banks by
of NBFC-UL was, however, lower at 20.5 per cent. NBFC-UL was secured in nature as against about
CRARs of HFCs (UL+ML) stood at 27.2 per cent 70 per cent by NBFC-ML. The share of resources
as of end-September 2024. Upper layer NBFCs mobilised by NBFCs from banks have decreased
over the last one year (Table 2.7).
were consistently maintaining an elevated NIM at
around 8 per cent, which was more than double II.3.1 Stress Test33 - Credit Risk
that of NBFC-ML. Nevertheless, profitability of 2.62 System level stress tests for assessing the
NBFC-UL and NBFC-ML remained comparable in resilience of the NBFC sector to shocks in credit risk
terms of ROA and ROE (Chart 2.31). were conducted on a sample of 16234 NBFCs, whose

Chart 2.31: Capital Adequacy and Profitability

Notes: 1) NIM = (Interest Income - Interest Expense) / Average (Gross loans and advances + Total Investments)
2) RoE = (Annualised PAT) / Average (Capital + Reserves)
Sources: RBI supervisory returns and staff calculations.

33
The detailed methodology used for stress tests of NBFCs is given in Annex 2.
34
The sample comprised of 162 NBFCs from Upper Layer and Middle Layer with total advances of ₹25.00 lakh crore as of September 2024, which forms
around 95 per cent of total advances of non-Government NBFCs. The sample for stress test excluded Government NBFCs, companies presently under
resolution, standalone primary dealers, and investment focused companies to ensure better representation of credit risk of the sector.

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.32: Liquidity Stock Measures

Sources: RBI supervisory returns and staff calculations.

combined capital adequacy ratios and GNPA ratios high risk – with increase in GNPA ratios by 1 SD
stood at 23.6 per cent and 2.9 per cent, respectively, and 2 SD, respectively.
in September 2024. The tests were carried out under 2.63 Under the baseline scenario, the one year
a baseline and two stress scenarios – medium and ahead GNPA ratio for the system is estimated at
3.4 per cent and the system level CRAR at 21.2 per
Table 2.7: NBFCs’ Sources of Funds cent. CRARs of 11 NBFCs fall below the minimum
(per cent)
regulatory requirement of 15 per cent. Under the
Item Description NBFC-UL NBFC-ML
Sep-23 Sep-24 Sep-23 Sep-24 medium and high-risk scenarios, income loss
1. Share Capital, 18.1 18.4 23.2 24.2 and additional provision requirements would
Reserves and
reduce CRAR of the sector further (compared to
Surplus
2. Total Borrowings 70.3 69.9 67.4 67.0 the baseline) by 70 bps and 100 bps, respectively
Of which: (Chart 2.33).
2 (i) Borrowing 30.4 30.0 24.2 24.1
Chart 2.33: Credit Risk in NBFCs - System Level
from banks
2(ii) CPs 1.1 0.8 0.3 0.2
subscribed
by banks
2(iii) Debentures 4.3 3.8 2.2 2.1
subscribed
by banks
Total from banks
 35.8 34.6 26.7 26.3
[2(i)+2(ii)+2(iii)]
2(iv) CPs 3.7 2.7 1.4 1.4
excluding
2(ii)
2(v) Debentures 16.0 16.4 23.9 23.7
excluding
2(iii)
3. Public Deposits 6.8 7.2 0.6 0.5
Note: Baseline scenario is based on assumptions of business continuing
4. Others 4.8 4.6 8.8 8.3 under usual conditions for one year ahead, whereas medium risk and
Total 100.0 100.0 100.0 100.0 high-risk scenarios assume GNPA ratio increasing by 1 SD and 2 SD,
respectively, over one year horizon.
Sources: RBI supervisory returns and staff calculations. Sources: RBI supervisory returns and staff calculations.

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 Financial Stability Report December 2024

II.3.2 Stress Test - Liquidity Risk and AMCs specify the thresholds of impact for risk
parameters: breach of either the AMFI or the AMC
2.64 The resilience of the NBFC sector to liquidity
threshold requires reporting and remedial action.
shocks has been assessed by estimating the impact
of an increase in cash outflows coupled with a 2.66 In September 2024, 34 open-ended debt
decline in cash inflows35. A liquidity mismatch schemes with total AUM of ₹2.75 lakh crore
over one year is likely to be capped within 20 per breached the AMFI or AMC prescribed threshold
cent; although a weak tail of NBFCs may experience (Table 2.9). In this respect, all the mutual funds
higher liquidity mismatch in medium and high risk (MFs) have reported initiation of remedial action to
scenarios (Table 2.8). be completed in the prescribed timeframe.

II.4 Stress Testing of Mutual Funds 2.67 Furthermore, as part of liquidity risk
management for open-ended debt schemes, two
2.65 The Securities and Exchange Board of
types of liquidity ratios, viz., (i) redemption at
India (SEBI) has mandated that asset management
risk (LR-RaR), which represents likely outflows at
companies (AMCs) should carry out stress testing36
a given confidence interval, and (ii) conditional
of all open-ended debt schemes (except overnight
redemption at risk (LR-CRaR), which represents
schemes) every month to evaluate the impact of the behaviour of the tail at the given confidence
various risk parameters (viz., interest rate risk, interval, have been used. All AMCs are mandated
credit risk, liquidity risk and redemption risk) faced to maintain these liquidity ratios above the
by such schemes on their net asset values (NAVs). threshold limits which are derived from scheme
The Association of Mutual Funds in India (AMFI) type, scheme asset composition and potential
outflows (modelled from investor concentration in
Table 2.8: Liquidity Risk in NBFCs
the scheme). MFs are required to carry out back-
No. of NBFCs having
Cumulative Mismatch as percentage Liquidity Mismatch testing of these liquidity ratios for all open-ended
of Outflows over next one year
Baseline Medium High debt schemes (except overnight funds, gilt funds
Over 50 per cent 0 (0.0) 1 (0.1) 1 (0.1) and gilt funds with 10-year constant duration) on a
Between 20 and 50 per cent 1 (0.1) 3 (0.9) 7 (1.6)
monthly basis.
Between 15 and 20 per cent 2 (0.8) 1 (0.3) 6 (4.8)
Between 10 and 15 per cent 1 (0.1) 3 (0.3) 7 (0.8) Table 2.9: Stress Testing of Open-Ended Debt Schemes of Mutual
Between 5 and 10 per cent 1 (0.3) 5 (4.3) 8 (10.1) Funds – Summary Findings – September 2024

5 per cent and below 3 (0.3) 8 (1.7) 5 (1.6) Risk above Risk below Total
Threshold Threshold
Notes: (i) Baseline scenario is based on projected outflows and inflows
over next one year as of September 2024; medium risk No. of AMCs 20 24 44
scenario assumes 5 per cent decrease in inflows and 5 per No. of Schemes 34* 261 295
cent increase in outflows and high-risk scenario assumes
AUM (₹crore) 2,74,724 11,93,923 14,68,647
10 per cent decrease in inflows and 10 per cent increase in
outflows. Note: * No. of schemes showing interest rate risk, credit risk and
(ii) Figures in parenthesis represent percentage share in asset liquidity risk above threshold are 22, 13 and 0, respectively, while total
size of the sample. number of unique schemes remain 34.
Sources: RBI supervisory returns and staff calculations. Source: SEBI.

35
Stress testing based on liquidity risk was performed on a sample of 218 NBFCs from Upper Layer and Middle Layer. The total asset size of the sample
was ₹33.61 lakh crore, comprising around 99 per cent of total assets of non-government, non-CIC NBFCs in the sector.
36
The methodology used for stress testing of mutual funds is given in Annex 2.

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Chapter II Financial Institutions: Soundness and Resilience

2.68 The LR-RaR and LR-CRaR computed by top respective AMCs in a timely manner (Chart 2.34
10 MFs (based on AUM) for 13 categories of open- and Chart 2.35).
ended debt schemes were well above the respective II.5 Stress Testing Analysis at Clearing
threshold limits for most of the MFs in September Corporations
2024. A few instances of the ratios falling below 2.69 Stress testing37 has been carried out at
the threshold limits were addressed by the clearing corporations (CCs) to determine the

Chart 2.34: Range (Surplus (+)/ Deficit (-)) of LR-RaR Maintained by AMCs over AMFI Prescribed Limits

Note: Data pertains to Top 10 AMCs based on AUM as on September 30, 2024.
Source: SEBI.

Chart 2.35: Range (Surplus (+)/ Deficit (-)) of LR-CRaR Maintained by AMCs over AMFI Prescribed Limits

Note: Data pertains to Top 10 AMCs based on AUM as on September 30, 2024.
Source: SEBI.

37
The methodology used for stress testing at clearing corporations is given in Annex 2.

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 Financial Stability Report December 2024

segment-wise minimum required corpus (MRC), Table 2.10: Minimum Required Corpus of Core SGF Based on Stress
Testing Analysis at Clearing Corporations (Amount in ₹crore)
which needs to be contributed by clearing members
Segment May- Jun- Jul- Aug- Sep-
(CMs) to the core settlement guarantee fund (Core 24 24 24 24 24
SGF). The stress testing exercises aid in determining Clearing Corporation 1
Average Stress Test Loss
MRC for each segment (viz., equity cash, equity
Equity Cash Segment 69 172 39 102 69
derivatives, currency derivatives, commodity Equity Derivatives 630 2616 768 755 714
derivatives, debt and tri-party repo segment) Segment
Currency Derivatives 126 144 132 124 108
every month. Segment
Debt Segment 0 0 0 0 0
2.70 The actual MRC requirement for any given
Tri-Party Repo Segment 0 0 0 0 0
month is determined as the higher of the MRC of Commodity Derivatives 0 0 1 2 3
the month and the MRC arrived at any time in the Segment
Total 826 2932 940 982 894
past. Stress test analysis for the period May 2024 to Actual MRC Requirement
September 2024 indicated that while the monthly Equity Cash Segment 388 388 388 388 388
calculated amounts of MRC at CCs varied over Equity Derivatives 2423 2423 2423 2616 2616
Segment
months, the actual MRC requirement remained the Currency Derivatives 242 242 242 242 242
same for most of the segments. The MRC requirement Segment
Debt Segment 4 4 4 4 4
for one of the CCs in equity derivatives segment and
Tri-Party Repo Segment 17 17 17 17 17
another CC in the commodity derivatives segment, Commodity Derivatives 10 10 10 10 10
however, increased during the period (Table 2.10). Segment
Total 3,085 3,085 3,085 3,277 3,277
II.6 Insurance Sector Clearing Corporation 2
Average Stress Test Loss
2.71 The solvency ratio of an insurance company Equity Cash Segment 27 32 30 19 24
assesses its ability to meet its obligations towards Equity Derivatives 22 57 17 23 14
Segment
policyholders by reflecting the level of its assets
Currency Derivatives 0.0 0.2 0.0 0.2 0.5
over and above its liabilities. The higher the Segment
Commodity Derivatives 0 0 0 0 0
solvency ratio, the better the ability of the insurer Segment
to meet its liabilities. The Insurance Regulatory and Total 48 89 47 42 38
Development Authority of India (IRDAI) has set the Actual MRC Requirement
Equity Cash Segment 194 194 194 194 194
minimum solvency ratio requirement for insurance
Equity Derivatives 74 74 74 74 74
companies in India at 150 per cent. As insurance Segment
liabilities are contingent upon future events, a higher Currency Derivatives 388 388 388 388 388
Segment
solvency ratio implies resilience of the insurer to Commodity Derivatives 14 14 14 14 14
withstand future uncertainties. Segment
Total 670 670 670 670 670
2.72 The aggregate solvency ratio for life insurance Clearing Corporation 3 (Commodity Derivatives Segment)

companies has remained above the prescribed Average Stress Test Loss 50 44 50 47 56
Actual MRC requirement 124 124 124 124 124
threshold for both public and private sectors (Table Clearing Corporation 4 (Commodity Derivatives Segment)
2.11). The solvency ratio for three public sector non- Average Stress Test Loss 483 477 618 626 504
life insurers, however, stood below the baseline Actual MRC requirement 562 562 562 562 618
Note: Average stress test loss calculated for a month M is applicable
prescription. It remained well above the threshold as MRC, from the month M+2.
for rest of the non-life insurer categories (Table 2.12). Source: Clearing corporations.

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Chapter II Financial Institutions: Soundness and Resilience

Table 2.11: Solvency Ratio of Life Insurance Sector diversification of risks, they can become conduits of
(per cent)
risk transmission and risk amplification in a crisis.
Public Private Life Insurance
Sector Sector Industry Understanding the nuances in propagation of risk
Sep-23 190 220 197 through networks is useful for devising appropriate
Dec-23 193 215 198
policy responses for safeguarding macroeconomic
Mar-24 198 207 200
and financial stability.
Jun-24 199 210 202
Source: IRDAI. II.7.1 Financial System Network38 39
Table 2.12: Solvency Ratio of Non-Life Insurance Sector
2.74 The total outstanding bilateral exposures40
(per cent)
among the entities in the Indian financial system
Stand Alone Non-Life
PSU Private Specialised
Insurers Insurers
Health
Insurers
Insurance continued to expand during H1:2024-25. While the
Insurers Industry
Sep-23 39 228 195 689 164
annual growth of bilateral exposures fluctuated
Dec-23 39 223 209 774 165 between 15 and 19 per cent, a surge during
Mar-24 35 223 208 835 166 H1:2024-25 was primarily driven by the rise in
Jun-24 31 227 208 855 167 exposure of AMC-MFs and NBFCs to SCBs. Further,
Source: IRDAI.
the conversion of two HFCs to NBFCs (non-HFC)
II.7 Interconnectedness also contributed to a higher share of NBFCs (non-
HFC) and a decline in the share of HFCs in bilateral
2.73 Interconnections among financial
exposures. (Chart 2.36 a and b).
institutions involve funding gaps arising due to
liquidity mismatches and maturity transformation, 2.75 The funding mix of the financial system
payments processes, and risk transfer mechanisms. shows that long-term (LT) funding - primarily loans
The financial system can be visualised as a network and advances, equity and other LT debt instruments
where financial institutions act as nodes and the - provided a major channel for bilateral exposures
bilateral exposures among them serve as links in the system. A segment wise analysis broadly
connecting these nodes. These links could be in indicated that (a) LT loans were mainly advanced by
the form of loans to, investments in, or deposits SCBs to NBFCs; (b) AMC-MFs were major investors
with each other, which act as a source of funding, in the equities issued by PVBs and NBFCs; and
liquidity, investment and risk diversification. (c) in the LT debt market, insurance companies
While these links enable gains in efficiency and held the majority of instruments issued by PVBs,

38
The network model used in the analysis has been developed by Professor Sheri Markose (University of Essex) and Dr. Simone Giansante (Bath
University) in collaboration with the Financial Stability Department, Reserve Bank of India.
39
Analyses presented here and in the subsequent part are based on data of 229 entities from the following eight sectors: SCBs, scheduled UCBs (SUCBs),
AMC-MFs, NBFCs, HFCs, insurance companies, pension funds and AIFIs. These 229 entities covered include 77 SCBs, 11 small finance banks (SFBs),
20 SUCBs; 25 AMC-MFs (which cover more than 98 per cent of the AUMs of the mutual fund sector); 43 NBFCs (both deposit taking and non-deposit
taking systemically important companies, which represent about 70 per cent of total NBFC assets); 22 insurance companies (that cover more than 95
per cent of assets of the sector); 16 HFCs (which represent more than 75 per cent of total HFC assets); 10 PFs and 5 AIFIs (NABARD, EXIM, NHB, SIDBI
and NaBFID).
40
Includes exposures between entities of the same group. Exposures are outstanding position as on September 30, 2024 and are broadly divided
into fund-based and non-fund-based exposure. Fund-based exposure includes money market instruments, deposits, loans and advances, long-term
debt instruments and equity investments. Non-fund- based exposure includes letter of credit, bank guarantee and derivative instruments (excluding
settlement guaranteed by CCIL).

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 Financial Stability Report December 2024

Chart 2.36: Bilateral Exposures between Entities in the Financial System

a. Total Bilateral Exposures b. Share of Different Groups

Note: Exposures between entities of the same group are included.

Sources: Supervisory returns of various regulators and RBI staff calculations.

NBFCs (non-HFC) and HFCs. In the short-term (ST) 2.76 In terms of inter-sectoral exposures41, AMC-
funding mix, apart from inter-bank ST loans and MFs, insurance companies and PSBs remained
deposits, CPs and CDs played a significant role. In the largest fund providers in the system, whereas
the CP market, AIFIs, NBFCs (non-HFC) and HFCs NBFCs and PVBs were the largest receivers of funds,
were the largest receivers of funds and AMC-MFs followed by HFCs. Among bank groups, PSBs and
were the largest investor group. On the other hand, UCBs had net receivable positions vis-à-vis the
PSBs, PVBs and AIFIs were the major fund receivers entire financial sector whereas PVBs, FBs and SFBs
in the CD market, where AMC-MFs were the largest had net payable positions (Chart 2.38).
fund providers (Chart 2.37).
Chart 2.38: Network Plot of the Financial System - September 2024
Chart 2.37: Instrument-wise Exposure among Entities in the
Financial System

Note: Receivables and payables do not include transactions

among entities of the same group. Red circles are net payable
Note: Exposures between entities of the same group are included. institutions and the blue ones are net receivable institutions.
Sources: Supervisory returns of various regulators and RBI staff Sources: Supervisory returns of various regulators and RBI staff
calculations. calculations.

41
Inter-sectoral exposures do not include transactions among entities of the same sector in the financial system.

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Chapter II Financial Institutions: Soundness and Resilience

2.77 The net receivable positions of AMC-MFs Chart 2.40: Inter-Bank Market

and net payable positions of PVBs and NBFCs

recorded large increases in September 2024 vis-à-
vis September 2023 (Chart 2.39).

a. Inter-Bank Market

2.78 Inter-bank exposures were 3.3 per cent of

the total assets of the banking system in September
2024. During H1:2024-25, fund-based exposures42
increased marginally while non-fund-based
exposures receded marginally (Chart 2.40).
43

Sources: RBI supervisory returns and staff calculations.

2.79 PSBs continued to dominate the inter-bank
market, followed by PVBs and FBs. The share of
term in nature in which ST deposits and ST loans
PSBs increased while that of PVBs and FBs declined
constituted over 70 per cent. There was a notable
in H1:2024-25 (Chart 2.41).
rise (y-o-y) in share of CDs, inter alia, due to higher
2.80 Unlike in the overall financial network in
issuance of CDs by banks. The share of LT deposits
which LT fund-based exposure forms a major part,
ST funding plays a crucial role in the inter-bank increased whereas that of LT loans and LT debt in

market. As at end-September 2024, 74 per cent LT fund-based inter-bank market declined during
of the fund-based inter-bank market was short- this period (Chart 2.42).

Chart 2.39: Net Receivables (+ve)/ Payables (-ve) by Institutions

Note: Receivables and payables do not include transactions among entities of the same group.
Sources: Supervisory returns of various regulators and RBI staff calculations.

42
Fund-based exposures include both short-term exposures and long-term exposures. Data on short-term exposures are collected across seven
categories – repo (non-centrally cleared); call money; commercial papers; certificates of deposits; short-term loans; short-term deposits and other short-
term exposures. Data on long-term exposures are collected across five categories – Equity; Long-term Debt; Long-term loans; Long-term deposits and
Other long-term liabilities.
43
Non-Fund based exposures include - outstanding bank guarantees, outstanding Letters of Credit, and positive mark-to-market positions in the
derivatives market (except those exposures for which settlement is guaranteed by the CCIL).

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 Financial Stability Report December 2024

Chart 2.41: Share of Different Bank Groups in the Inter-Bank Market is highly skewed, with most banks having few
links and few banks having many links. This has
resulted into a typical core-periphery network
structure44 45. As of end-September 2024, two banks
(one PSB and one PVB) were in the inner-most core
and nine banks in the mid-core circle. The mid-core
consisted of PSBs, PVBs and FBs. Most of the old
PVBs along with FBs, SUCBs and SFBs formed the
periphery (Chart 2.43).

2.82 While the degree of interconnectedness

Sources: RBI supervisory returns and staff calculations. among SCBs in terms of the number of links, as
measured by the connectivity ratio46, increased
b. Inter-Bank Market: Network Structure and marginally in H1:2024-25, the cluster coefficient47,
Connectivity i.e., the number of connections along with
2.81 The distribution of the number of links interconnections of neighbouring nodes, reduced
between entities in the inter-bank market network marginally (Chart 2.44).

Chart 2.42: Composition of Fund based Inter-Bank Market

a. ST Fund-based b. LT Fund-based

Sources: RBI supervisory returns and staff calculations.

44
The diagrammatic representation of the network of the banking system is that of a tiered structure, in which different banks have different degrees
or levels of connectivity with others in the network. The most connected banks are in the inner-most core (at the centre of the network diagram). Banks
are then placed in the mid-core, outer core and the periphery (concentric circles around the centre in the diagram), based on their level of relative
connectivity. The colour coding of the links in the tiered network diagram represents borrowings from different tiers in the network (for example, the
green links represent borrowings from the banks in the inner core). Each ball represents a bank and they are weighted according to their net positions
vis-à-vis all other banks in the system. The lines linking each bank are weighted on the basis of outstanding exposures.
45
77 SCBs, 11 SFBs and 20 SUCBs were considered for this analysis.
46
The Connectivity ratio measures the actual number of links between the nodes relative to all possible links in a complete network.
47
Cluster Coefficient: Clustering in networks measures how interconnected each node is. Specifically, there should be an increased probability that
two of a node’s neighbours (banks’ counterparties in case of the financial network) are also neighbours themselves. A high cluster coefficient for the
network corresponds with high local interconnectedness prevailing in the system.

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.43: Network Structure of the Indian Banking System (SCBs + SFBs + SUCBs) – September 2024

Sources: RBI supervisory returns and staff calculations.

c. Exposure of AMC-MFs ₹1.19 lakh crore as at end-September 2024. SCBs

2.83 Gross receivables of AMC-MFs stood at (primarily PVBs) remained the major recipients of
₹19.16 lakh crore (around 29 per cent of their their funding, followed by NBFCs, AIFIs and HFCs
average AUM) whereas their gross payables were (Chart 2.45 a).

2.84 The share of equity holdings in total assets

Chart 2.44: Connectivity Statistics of the Banking System (SCBs)
of AMC-MFs continued to rise. There was notable
increase in AMC-MFs' investment in CDs whereas
their CP investment came down during the period
(Chart 2.45 b).

d. Exposure of Insurance Companies

2.85 With gross receivables at ₹10.44 lakh crore

and gross payables at ₹0.86 lakh crore, insurance
companies were the second largest net providers of
funds to the financial system in September 2024.
Sources: RBI supervisory returns and staff calculations. SCBs (primarily PVBs) were the largest recipients

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 Financial Stability Report December 2024

Chart 2.45: Gross Receivables of AMC-MFs from the Financial System

a. Share of Top 4 Borrower Groups b. Share of Top 4 Instruments

Sources: Supervisory returns of various regulators and RBI staff calculations.

of their funds, followed by NBFCs (non-HFC) and A breakup of their gross payables reveals that the
HFCs. LT debt and equity accounted for more than bulk of funds were sourced from SCBs, followed by
90 per cent of receivables of insurance companies; AMC-MFs and insurance companies (Chart 2.47 a).
they had limited exposure to ST instruments 2.87 The choice of instruments in the funding
(Chart 2.46 a and b). mix of NBFCs (non-HFC) shows high reliance on
LT funds. While the raising of funds by NBFCs
e. Exposure to NBFCs (non-HFC)
through LT loans (from SCBs) declined during
2.86 NBFCs (non-HFC) were the largest net H1:2024-25, the reliance on borrowing through LT
borrowers of funds of the financial system, with debt instruments increased, which were largely
gross payables of ₹19.16 lakh crore and gross held by insurance companies and AMC-MFs
receivables of ₹2.19 lakh crore in September 2024. (Chart 2.47 b).

Chart 2.46: Gross Receivables of Insurance Companies from the Financial System

a. Share of Top 3 Borrower Groups b. Share of Top 2 Instruments

Sources: Supervisory returns of various regulators and RBI staff calculations.

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Chapter II Financial Institutions: Soundness and Resilience

Chart 2.47: Gross Payables of NBFCs to the Financial System

a. Share of Top 3 Lender Groups b. Share of Top 4 Instruments

Sources: Supervisory returns of various regulators and RBI staff calculations.

f. Exposure to HFCs AIFIs were net borrowers of the financial system

2.88 HFCs remained the second largest net in September 2024. They raised funds mainly from
borrowers and had gross payables of ₹5.45 lakh SCBs, AMC-MFs and insurance companies. Given
crore against gross receivables of ₹0.12 lakh crore their nature of operations, long-term instruments
in September 2024. SCBs followed by AMC-MFs such as LT debt, LT loans and LT deposits
and insurance companies were the major providers remained their preferred instruments for resource
of funds. About 75 per cent of HFCs’ resource mobilisation, though the combined share of these
mobilisation was through LT loans and LT debt instruments came down marginally to 48.5 per cent
instruments (Chart 2.48 a and b). from 51.3 per cent a year ago, while the borrowing
g. Exposure to AIFIs through ST loans and other ST instruments
increased (Chart 2.49 a and b).
2.89 With gross payables and receivables at
₹7.95 lakh crore and ₹7.66 lakh crore, respectively,

Chart 2.48: Gross Payables of HFCs to the Financial System

a. Share of Top 3 Lender Groups b. Share of Top 4 Instruments

Sources: Supervisory returns of various regulators and RBI staff calculations.

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 Financial Stability Report December 2024

Chart 2.49: Gross Payables of AIFIs to the Financial System

a. Share of Top 3 Lender Groups b. Share of Top 4 Instruments

Sources: Supervisory returns of various regulators and RBI staff calculations.

II.7.2 Contagion Analysis banking system. Also, it will not lead to failure of
any additional bank (Table 2.13).
2.90 Contagion analysis uses network technology
to estimate the systemic importance of different b. Solvency Contagion Impact on SCBs due to
financial institutions. The failure of a systemically NBFC/ HFC Failure
important bank entails greater solvency and 2.92 As NBFCs (non-HFC) and HFCs are among
liquidity losses for the banking system which, in the largest borrowers of funds from the financial
turn, depend on the initial capital and liquidity system with a substantial part of funding from
positions of banks along with the number, banks, failure of any of such institution will act as
magnitude, and nature (whether it is a lender or a solvency shock to their lenders which can spread
a borrower) of the interconnections that a failing through contagion.
bank has with the rest of the banking system.
Table 2.13: Contagion Losses due to Bank Failure – September 2024
a. Joint Solvency48- Liquidity49 Contagion Impact Name of Solvency Liquidity Number Number
on SCBs due to Bank Failure Bank Losses as per Losses as per of Banks of Banks
cent of Tier cent of HQLA Defaulting Defaulting
1 Capital of due to due to
2.91 Contagion analysis of the banking network the Banking Solvency Liquidity
on the end-September 2024 position indicates that System
Bank 1 3.10 0.22 0 0
if the bank with the maximum capacity to cause
Bank 2 1.78 0.00 0 0
contagion losses fails, it will cause a solvency loss Bank 3 1.59 0.51 0 0
of 3.10 per cent (as compared to 5.06 per cent in Bank 4 1.46 0.40 0 0

March 2024) of total Tier 1 capital of SCBs and Bank 5 1.34 0.06 0 0
Note: Top five ‘Trigger banks’ have been selected on the basis of solvency
liquidity loss of 0.22 per cent (as compared to losses caused to the banking system.
Sources: RBI supervisory returns and staff calculations.
0.31 per cent in March 2024) of total HQLA of the

48
In solvency contagion analysis, gross loss to the banking system owing to a domino effect of hypothetical failure of one or more borrower banks is
ascertained. Failure criterion for contagion analysis has been taken as Tier 1 capital falling below 7 per cent.
49
In liquidity contagion analysis, a bank is considered to have failed when its liquid assets are not enough to tide over a liquidity stress caused by the
hypothetical failure of large net lender. Liquid assets are measured as: 18 per cent of NDTL + excess SLR + excess CRR.

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Chapter II Financial Institutions: Soundness and Resilience

Table 2.14: Contagion Losses due to NBFC Failure – Table 2.15: Contagion Losses due to HFC Failure –
September 2024 September 2024
Solvency Losses as per Number of Banks HFC Solvency Losses as per Number of Banks
NBFC
cent of Tier 1 Capital of Defaulting due to Name cent of Tier 1 Capital of Defaulting due to
Name
the Banking System Solvency the Banking System Solvency
NBFC 1 2.74 0 HFC 1 4.14 0
NBFC 2 2.58 0 HFC 2 1.29 0
NBFC 3 2.28 0
HFC 3 1.04 0
NBFC 4 1.80 0
HFC 4 0.77 0
NBFC 5 1.75 0
HFC 5 0.73 0
Note: Only Private NBFCs are considered. Top five ‘Trigger NBFCs’
have been selected on the basis of solvency losses caused to the Note: Top five ‘Trigger HFCs’ have been selected on the basis of
banking system. solvency losses caused to the banking system.
Sources: RBI supervisory returns and staff calculations. Sources: RBI supervisory returns and staff calculations.

2.93 By end-September 2024, the hypothetical cent (3.87 per cent in March 2024) of the latter’s
failure of the NBFC with the maximum capacity to total Tier 1 capital but without failure of any bank
cause solvency losses to the banking system would (Tables 2.14 and 2.15).
have knocked off 2.74 per cent (2.29 per cent in
2.94 By leveraging the bilateral exposure data
March 2024) of the latter’s total Tier 1 capital but
collected for contagion analysis, impact and
it would not lead to failure of any bank. Similarly,
vulnerability metrics have been constructed to
the hypothetical failure of the HFC with the
identify banks which are highly impactful and
maximum capacity to cause solvency losses to the
vulnerable at the same time (Box 2.3).
banking system would have knocked off 4.14 per

Box 2.3: Identification of Impactful and Vulnerable Banks

The evolving landscape of the financial system calls measures (Chart 1). Based on the recommendations of
for better understanding of the build-up of systemic the IMF (2024), impact and vulnerability metrics for
risk in the complex interactions between different banks have been compiled.
financial intermediaries - not only banks but also non-
Chart 1: Representation of Impactful and Vulnerable banks
bank financial institutions. When a bank experiences
financial stress, its vulnerabilities may spill over
and contaminate the broader financial system. The
identification of such banks that are impactful (i.e.,
those causing sizeable capital losses throughout
the system upon their default) and vulnerable (i.e.,
their own capital loss susceptibility conditional on
other entities’ failures) can help understand how the
vulnerabilities in impactful entities propagate shocks
through the network and lead to contagion in the
broader financial system during a crisis and can possibly
guide policy makers on macro-prudential policy
(Contd.)

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 Financial Stability Report December 2024

Data on bilateral exposures among entities of the if its capital is insufficient to fully cover its losses
financial system can be leveraged to compute impact due to the default of bank j, i.e., if - λ < 0,
and vulnerability metrics to identify entities that are where stands for exposure of bank i to
impactful and vulnerable, using the following metrics bank j and stands for bank i’s capital. In the
and methodology (IMF, 2017): subsequent rounds, if there are further failures,
the losses are aggregated.
(i) Index of contagion (impact) of a bank represents
the average loss experienced by other banks Scatter plot of impact and vulnerability indices of all 77
(expressed as a percentage of their Tier 1 capital) banks (PSBs, PVBs and FBs) included in the analysis for
due to failure of the bank. September 2024 shows that the bank which occupies
the topmost position in terms of impact is different
Index of contagion (impact) of bank
from the topmost bank in terms of vulnerability.
i = 100 ( )/ ( 1)
Hence, the set of top ten highly impactful banks
where is bank j’s capital, is the loss to bank and the set of top ten highly vulnerable banks are
j due to the default of bank i and N is the total considered. However, there is no bank common
number of banks; between these two sets in September 2024. Over a
(ii) Index of vulnerability of a bank represents the longer horizon (September 2019 to September 2024),
average loss experienced by the bank (expressed one bank emerged to be both impactful and vulnerable
as a percentage of its Tier 1 capital) across at the same time in each period among the top ten
individually triggered failures of all other banks. ones, although such bank differed from period to
period (Chart 2 a and b).
Index of vulnerability of bank
i = 100 ( )/ ( 1) As an extension of the analysis, vulnerability of banks
due to failure of NBFCs and HFCs is also assessed.
where is bank i’s capital, is the loss to bank
Vulnerability indices of PSBs due to the failure of
i due to the default of bank j and N is the total
NBFCs/HFCs are found to be higher relative to other
number of banks;
bank groups during 2019 to 2024. Within the PVBs’
(iii) 
To analyse the effects of a credit shock, the cohort, old banks are more vulnerable as compared to
present exercise simulates individual default of the newer ones. Further, vulnerability indices of four
each bank with 100 per cent loss-given-default banks on account of failure of NBFCs are comparatively
(λ = 1), where the counterparties’ capitals absorb higher (more than 2 per cent), while these indices are
the losses on impact. Then, bank i is said to fail, higher for only two banks due to the failure of HFCs
Chart 2: Scatter Plot of Impactful and Vulnerable Banks

a. September 2023 b. September 2024

Source: RBI staff calculations.

(Contd.)

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Chapter II Financial Institutions: Soundness and Resilience

(Chart 3 a and b). Also, the impact index shows that In short, within the cohort of top ten highly vulnerable
the failure of one NBFC can impact banks by more and impactful banks, there is no bank which is highly
than 2 per cent of their capital on an average due to impactful and vulnerable at the same time. Among the
its higher borrowings from banks, whereas HFCs do bank groups, PSBs are more vulnerable to failures of
not have a significant contagion impact on banks NBFCs/HFCs and, NBFCs may cause higher contagion
(Chart 3 c and d). impact on banks as compared to HFCs.
Chart 3: Impact and Vulnerability Metrics of NBFCs/HFCs - September 2024

a. Vulnerability Index of Banks due to Failure of NBFCs b. Vulnerability Index of Banks due to Failure of HFCs

c. Impact Index of Failure of NBFCs on Banks d. Impact Index of Failure of HFCs on Banks

Source: RBI staff calculations.

References: 2. 
International Monetary Fund (2024), ‘India:
1. International Monetary Fund (2017), Luxembourg Technical Assistance Report-Review and Evaluation
Financial Sector Assessment Program Technical of the Reserve Bank of India’s Stress Test Model
Note - Risk Analysis, August. Framework’, November 01, 2024.

c. Solvency Contagion Impact50 after result in distress to the banking system. In such a
Macroeconomic Shocks to SCBs situation, similar shocks may cause some SCBs to
2.95 Any contagion from failure of a bank is fail the solvency criterion, which, then, acts as a
likely to get magnified if macroeconomic shocks trigger for further solvency losses.

50
Failure Criterion for both PSBs and PVBs has been taken as Tier 1 CRAR falling below 7 per cent.

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 Financial Stability Report December 2024

Chart 2.50: Contagion Impact of Macroeconomic Shocks (Solvency Contagion)

a. Solvency Losses b. Defaulting Banks

Sources: RBI supervisory returns and staff calculations.

2.96 In the previous iteration, the shock was Summary and Outlook
applied to the entity that could cause the maximum 2.97 Bank credit growth has moderated but
solvency contagion losses. Here, we consider another remains in double digits and broad based. The asset
iteration, where the initial impact on an individual quality parameters of banks have improved further
bank’s capital is taken from the macro stress test and their capital levels remain robust. Although
results51. In such conditions, capital loss(+)/gain(-) net interest margins have narrowed, banks’ return
under various macroeconomic scenarios stood at (-) on equity and return on assets have improved.
0.1 per cent, 14.7 per cent and 5.8 per cent of Tier I MTM losses in the HTM books of SCBs have turned
capital for baseline, adverse scenario 1 and adverse a corner to record gains. The balance sheet of the
scenario 2, respectively. All banks would maintain NBFC sector has gained further strength.
the regulatory minimum capital in the baseline
2.98 Macro stress tests reveal that SCBs’ aggregate
scenario, whereas Tier I capital ratio would fall
capital would remain much higher than the
below 7 per cent for four banks in adverse scenario minimum regulatory capital requirements in March
1 and for one bank in adverse scenario 2. As a 2026 under adverse scenarios. Stress test for NBFCs
result, there would be marginal additional solvency shows that even under a high-risk scenario, their
losses to the banking system due to contagion CRARs would remain much above the regulatory
(over and above the initial loss of capital due to the minimum level. The ability of the financial
macro shocks), without failure of additional banks institutions to absorb shocks in adverse scenarios
(Chart 2.50 a and b). provide comfort on financing of economic growth
dynamics, going forward.

51
The contagion analysis used the results of the macro-stress tests and made the following assumptions:
(a) The projected losses under a macro scenario (calculated as reduction in projected Tier 1 CRAR, in percentage terms, in March 2026 with respect
to the actual value in September 2024) were applied to the September 2024 capital position assuming proportionally similar balance sheet
structures for both September 2024 and March 2026.
(b) Bilateral exposures between financial entities are assumed to be similar for September 2024 and March 2026.

105
Chapter III Regulatory Initiatives in the Financial Sector

Chapter III
Regulatory Initiatives in the Financial Sector

Global regulatory initiatives remained focused on strengthening the resilience of the financial system by mitigating
risks arising from technological advancements, cyber-security threats and third-party dependencies. Domestically,
regulators emphasised upon reinforcing the strength of financial intermediaries, preventing frauds and protecting
customers. The Financial Stability and Development Council (FSDC) and its Sub-Committee remain resolute
in their commitment to fostering a robust and efficient financial system for the Indian economy.

Introduction III.1 Global Regulatory Developments

3.1 As the global financial system navigates III.1.1 Markets and Financial Stability
through high uncertainty, regulators remain 3.3 The International Organisation of Securities
focused on strengthening the financial system Commissions (IOSCO) published a report1 on
and identification and mitigation of potential “Market Outages”2 in June 2024, proposing
vulnerabilities. Policymakers and international measures to enhance market resilience and
standard-setting bodies are prioritising measures to outlining appropriate response by trading venues
safeguard the resilience of an increasingly complex and their regulators in case of suspension of trading
financial system in an environment of technological due to a technical problem. Apart from taking stock
advancements and incorporating climate risk of the current legislative and regulatory framework
through proactive regulatory and supervisory surrounding business continuity plans, a survey
actions. Concurrently, regulatory initiatives are was done to gauge organisational requirements
being undertaken to address vulnerabilities in non- and arrangements of trading venues and market
participants. The survey found many episodes
bank financial intermediaries, the banking sector
of market outages on listed trading venues
and cross-border payment systems.
between 2018 and 2022, with ‘Software issues’
3.2 Against this backdrop, this chapter reviews and ‘Hardware issues’ cited to be the top reasons
the recent regulatory initiatives, both global and behind such incidents. The report enlists several
domestic, aimed at enhancing the stability and good practices, such as conducting lessons-learned
resilience of the financial system. exercises, establishing and publishing an outage

1
IOSCO (2024), “Market Outages”, June.
2
In the report ibid., “market outage” is used to refer to the disruption of outright/ orderly trading on a trading venue caused by a technical problem or
an operational issue, which leads to the suspension of trading.

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 Financial Stability Report December 2024

plan, methodology for alternative closing prices III.1.2 Technology and Financial Stability
and communication plans to help ensure business
3.5 Adoption of artificial intelligence (AI) by
continuity.
companies and service providers can help optimise
3.4 The IOSCO final report on “Leveraged 3
their operations and resource allocation. The pace
Loans and Collateralised Loan Obligations (CLOs)” at which AI-based technologies have, however,
reviews origination practices in the leveraged loan4 penetrated business operations and front-end
and CLO5 segments, highlighting good practices to consumer services has evoked concerns about
ensure adequate investor protection. The report the associated risks to wider public interest. The
observes that the borrower base has shifted from European Union (EU) enacted the European Artificial
traditional industrial sectors towards technology Intelligence Act (AI Act) in August 20247, pioneering
and healthcare with the credit profile of corporate the formulation of comprehensive regulations
borrowers broadly deteriorating. The current around the use of AI. The Act provides for ensuring
investor base majorly consists of non-banks as that any AI system8 developed and deployed in the
regulatory oversight has prompted banks to keep EU is reliable and safeguards people’s fundamental
less risky and less capital-intensive investments on
rights while creating a conducive environment for
books. There have been significant developments
innovation and investment.
in market practices including the rise in covenant-
lite6 deals, increasing complexity of documentation 3.6 The discussions9 held during the
and highly leveraged transactions. The IOSCO Organisation for Economic Co-operation and
has outlined twelve good practices across five Development and the Financial Stability Board
themes, viz., (i) origination and refinancing based (OECD – FSB) Roundtable on AI in Finance noted the
on sound business premise; (ii) transparency on rapid adoption of predictive10 AI systems, such as
EBITDA adjustments and other loan covenants; Machine Learning (ML) and Generative AI (GenAI)11,
(iii) strengthening alignment of interest from especially by banks and insurance companies and
loan origination to end investors; (iv) addressing called for policy makers to promote the safe use
interests of different market participants of AI in financial services. The report notes that
throughout the intermediation chain; and (v) the use of AI in finance has increased operational
disclosure of information on an ongoing basis. efficiency, risk modelling and fraud detection and

3
IOSCO (2024), “Leveraged Loans and CLOs Good Practices for Consideration”, June.
4
Loans to highly indebted, non-investment grade, nonfinancial corporate issuers. Such loans usually carry a floating rate of interest and, in contrast
to high yield bonds, are secured by the borrower’s assets.
5
A type of securitisation in which a portfolio of loans is bought by a special purpose vehicle that finances the portfolio by the issuance of financial
instruments in the form of bonds.
6
Fewer and looser provisions on investor protection.
7
European Commission Press Release IP/24/4123 “European Artificial Intelligence Act comes into force”, August 1, 2024.
8
The Act defines an ‘AI system’ as a machine-based system that is designed to operate with varying levels of autonomy and that may exhibit
adaptiveness after deployment and that, for explicit or implicit objectives, infers from the input it receives, how to generate outputs such as predictions,
content, recommendations or decisions that can influence physical or virtual environments.
9
OECD – FSB (2024), “Roundtable on Artificial Intelligence (AI) in Finance”, September.
10
IBM defines predictive artificial intelligence as use of statistical analysis and machine learning to identify patterns, anticipate behaviours and
forecast upcoming events.
11
IBM defines generative AI as deep-learning models that can generate high-quality text, images, and other content based on the data they were trained on.

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Chapter III Regulatory Initiatives in the Financial Sector

the sector is exploring the potential of GenAI for based intermediation in financial assets have the
internal applications. There is increasing reliance potential to alter market structures and may lead to
on data driven models, cloud services and third- network effects.
party provided AI software, which could amplify
3.8 The Financial Stability Board’s (FSB)
existing vulnerabilities in the financial sector.
report15 on the ‘Financial Stability Implications of
The report states that the policy and regulatory
Tokenisation’ focuses on a subset of tokenisation
frameworks surrounding the use of AI in financial
initiatives, viz., tokenised money16 based on
services should strive to achieve a balance between
distributed ledger technology (DLT), assessed to
encouraging innovation and ensuring consumer
be the most relevant for financial stability. The
protection and financial supervisors need to
report identifies several vulnerabilities associated
develop necessary expertise, tools and skills for
with DLT-based tokenisation that could impact
effective oversight of finance-based AI applications.
financial stability, including liquidity and maturity
3.7 Tokenisation has permeated the financial
12
mismatches, leverage, asset pricing and asset
sector through crypto-asset markets and the advent quality issues, interconnectedness and operational
of digital tokens created on programmable platforms fragilities. The FSB released a status report17 on
has provided an ecosystem where multiple issuers, the implementation of the “Crypto-Asset Policy
investors, payers and payees may issue, trade and Implementation Roadmap”, endorsed by the G20
settle transactions with traditional money and members in 2023, which highlights that stablecoin
other assets. Various projects and experiments issuers are becoming significant holders of
resulting in application of tokenisation in financial mainstream financial assets by virtue of owning
markets have garnered scrutiny from central banks, them as collateral. Linkages of crypto-assets with
given their regulatory ambit over payments system, core financial markets and institutions, however,
monetary policy and financial stability. In this appears to remain limited in scale. The report
context, the Bank for International Settlements states that nearly all FSB members have either put
(BIS) and the Committee on Payments and Market in place or are developing regulatory frameworks
Infrastructures (CPMI) submitted a joint report to 13
for crypto-assets and stablecoins. Key challenges in
the G2014 on “Tokenisation in the context of money regulatory enforcement include deliberate evasion
and other assets” which, inter alia, concludes that of regulation by entities, lack of compliance culture
token-based arrangements that provide platform- and data gaps. The FSB also undertook an analysis

12
Tokenisation is the process of generating and recording a digital representation of traditional assets on a programmable platform (BIS, 2024).
Bank for International Settlements (BIS) and Committee on Payments and Market Infrastructures (CPMI) (2024), “Tokenisation in the context of
13

money and other assets: concepts and implications for central banks: Report to the G20”, October.
14
The Group of Twenty (G20) is the premier forum for international economic cooperation. It plays an important role in shaping and strengthening
global architecture and governance on all major international economic issues.
15
FSB (2024), “The Financial Stability Implications of Tokenisation”, October.
16
Money which can be potentially used as a settlement currency for payments (e.g. commercial bank deposits and central bank deposits) and other
financial assets (e.g. securities such as mutual fund shares). The report does not examine initiatives involving central bank digital currencies (CBDCs)
or crypto-assets.
17
FSB (2024), “G20 Crypto-asset Policy Implementation Roadmap”, October.

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 Financial Stability Report December 2024

of cross-border regulatory and supervisory issues for banks heavily reliant on uninsured deposits.
of global stablecoin arrangements in EMDEs. The The report further highlights vulnerabilities
report18 posits that country specific macroeconomic beyond banks, including life insurers and non-bank
and demographic factors have led to a higher level real estate investors, whose interest rate-sensitive
of interest and activity related to stablecoins in assets expose them to heightened solvency and
EMDEs as compared to AEs. These developments liquidity risks in high interest rate environment.
can undermine the effectiveness of monetary policy, 3.10 The BCBS issued a consultative document21
circumvent capital controls, strain fiscal resources on “Principles for the sound management of
and threaten financial stability. Inconsistency in third-party risk”. The principles outline the risks
thresholds to identify a systemically important arising from banks’ increasing reliance on third-
stablecoin (e.g., an advanced economy versus a party service providers to access technological
small open emerging economy) remains a unique expertise, reduce costs, improve efficiency and
cross-border regulatory and supervisory challenge. focus on core activities. The principles establish
III.1.3 Banking and Financial Stability a common baseline for banks and supervisors
for the risk management of such third-party
3.9 The 2023 banking turmoil brought to
service arrangements and provide the necessary
fore a host of issues such as changed depositor
flexibility to accommodate evolving practices and
behaviour due to technological developments, the
regulatory frameworks across jurisdictions. The
advanced pace of bank runs in case of distress, the
BCBS working paper22 on “Novel risks, mitigants
materiality of additional liquidity risk factors and
and uncertainties with permissionless distributed
the role and use of supervisory monitoring tools.
ledger technologies” highlights that use of such
The Basel Committee on Banking Supervision
technologies by banks exposes them to operational
(BCBS) progress report19 on “The 2023 banking
risk and to a lesser extent liquidity risk and market
turmoil and liquidity risk” highlights the challenges
risk. Potential mitigants include effective business
in overseeing banks’ liquidity risk due to social
continuity practices and use of adequate safeguards
media usage, digitalisation of finance and first- and
such as allow-listing23 and smart contracts.
second- round propagation effects of failure of a
non-systemic bank. Addressing the same issue, III.1.4 Non-Banking Financial Intermediation
the FSB report20 titled “Depositor Behaviour and and Financial Stability

Interest Rate and Liquidity Risks in the Financial 3.11 The expansion of non-bank financial
System” emphasises the need for enhanced intermediation (NBFI), now comprising nearly
operational readiness for resolution, particularly half of the global financial assets, has not only

18
FSB (2024), “Report on Cross-border Regulatory and Supervisory Issues of Global Stablecoin Arrangements in Emerging Market and Developing
Economies (EMDEs)”, July.
19
BCBS (2024) “The 2023 banking turmoil and liquidity risk: a progress report”, October.
20
FSB (2024), “Depositor Behaviour and Interest Rate and Liquidity Risks in the Financial System”, October.
21
BCBS (2024), “Principles for the sound management of third-party risk”, July.
22
BCBS (2024), “Novel risks, mitigants and uncertainties with permissionless distributed ledger technologies”, August.
23
The consultative document defines ‘allow-listing’ as programming a token to be accessed only by approved addresses on the blockchain.

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Chapter III Regulatory Initiatives in the Financial Sector

increased the sector’s role in financing the real ensure ongoing effectiveness; and (iii) tweaking
economy but also its potential to amplify systemic existing liquidity stress tests and scenario designs
risks. The FSB has developed a work program to to cover a range of extreme but plausible scenarios,
enhance NBFI resilience, aiming to stabilise the including both backward-looking and hypothetical
demand for liquidity, improve risk monitoring and scenarios.
reduce the need for central bank interventions.
III.1.5 Cross-Border Payments and Financial
The FSB progress report24 in this regard notes that
Stability
the current design and implementation of NBFI
policies has continued to advance at an uneven 3.13 Following the GFC, the G20 introduced the
pace across jurisdictions. The report also outlines Legal Entity Identifier (LEI) system to improve
work to assess and address systemic risk in NBFI transparency and manage financial risk exposures
which is structured in three main areas viz., (i) across entities. Initially deployed in the over-the-
in-depth assessment and ongoing monitoring of counter (OTC) derivatives and securities markets,
vulnerabilities in NBFI; (ii) development of policies the LEI has since been adopted within the G20
to enhance NBFI resilience; and (iii) monitoring Roadmap to enhance cross-border payment
the implementation and assessment of the effects efficiency by supporting ‘Know Your Customer’
of NBFI reforms. The key deliverables for 2024- (KYC) processes and sanctions screening. The FSB
25 include: (a) closing identified data gaps for October 2024 progress report 26 on “Implementation
monitoring financial stability risks relating to open- of the Legal Entity Identifier” underscored the
ended funds liquidity mismatch and the use of LEI’s role in facilitating cross-border transactions.
liquidity management tools; (b) issuance of policy Since 2019, active LEIs have increased by 84 per
recommendations on liquidity preparedness of cent, with 1.5 million renewed and validated for
market participants for margin and collateral calls; data quality. However, broader LEI adoption faces
and (c) completion of policy work on transparency challenges including limited perceived incentives
in centrally cleared markets.
for voluntary adoption and high costs, especially for
3.12 The FSB’s final report on “Liquidity 25
low-income jurisdictions. To address these barriers,
Preparedness for Margin and Collateral Calls” notes the FSB recommends sustained efforts to promote
that margin and collateral calls are a necessary LEI use and urges jurisdictions to fully implement
protection against counterparty risk, but in times previously issued recommendations.
of stress they can amplify the demand for liquidity
III.1.6 Climate Finance and Financial Stability
by market participants and have a systemic impact
on broader markets. The policy recommendations 3.14 The Network for Greening the Financial
include, inter alia, (i) establishing contingency System (NGFS) has been playing a pivotal role in
funding plans to ensure that liquidity needs can be addressing the risks associated with climate change
met in case of increased margin and collateral calls; across the regulatory, investment and monetary
(ii) regular review of liquidity risk frameworks to policy fields, and its projects include developing

24
FSB (2024) “Enhancing the Resilience of Non-Bank Financial Intermediation Progress”, July.
25
FSB (2024) “Liquidity Preparedness for Margin and Collateral Calls: Final report”, December.
26
FSB (2024) “Implementation of the Legal Entity Identifier: Progress report”, October.

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 Financial Stability Report December 2024

supervisory practices for managing climate-related Stability and Development Council (FSDC-SC)
risks, designing climate scenarios and guiding chaired by the Governor, Reserve Bank of India
central banks on nature-related financial risks and met once in September 2024. The Sub-Committee
implications of climate change on monetary policy. reviewed major global and domestic macroeconomic
A conceptual framework27 on “Nature-related and financial developments alongwith issues
Financial Risks” was published by the NGFS to help relating to inter-regulatory coordination in the
develop a common understanding of such risks Indian financial sector. Members shared their
among central banks and financial supervisors. The assessments of potential risks to financial stability
framework and its guiding questions are intended to and discussed various issues that may have financial
facilitate identification, assessment, management stability implications. The Sub-Committee also
and disclosure of nature-related financial risks by reviewed the activities of various technical groups
various stakeholders. under its purview and the functioning of State-
level Coordination Committees (SLCCs) in States/
3.15 The NGFS report28 on “Climate change, the
Union Territories (UTs).
macroeconomy and monetary policy” was aimed
at identifying the ways in which physical hazards 3.18 The FSDC-SC resolved to continue its focus
and the transition to net zero can influence on improving financial sector resilience through
variables such as output and inflation. The report inter-regulatory coordination while remaining
also provides guidelines to assist central banks watchful of emerging challenges to the economy
in understanding the macroeconomic impacts of and the financial system, including those from
climate-related developments on monetary policy global spillovers, cyber risks and climate change.
and incorporation of climate related impacts in III.3 Initiatives from Regulators / Authorities
central banks’ modelling toolkits.
3.19 During the period under review, financial
3.16 The FSB progress report29 on “Achieving regulators undertook several initiatives to improve
Consistent and Comparable Climate-Related the resilience of the Indian financial system (major
Disclosures” details the implementation status measures are listed in Annex 3).
of sustainability disclosure frameworks and
III.3.1 Directions on Fraud Risk Management to
development of global assurance and ethics
Regulated Entities
standards for such disclosures and observes that
significant progress has been achieved since 2021 3.20 The RBI issued revised directions on
in setting regulations, guidelines or strategic Fraud Risk Management for its regulated entities
roadmaps for climate-related disclosures. (REs), outlining a comprehensive framework for
prevention, early detection and timely reporting
III.2 Domestic Regulatory Developments
of incidents of fraud to Law Enforcement Agencies
3.17 Since the publication of the June 2024 issue (LEAs) and Supervisors. These directions further
of the FSR, the Sub Committee of the Financial strengthen the role of the Board in overall

27
Network for Greening the Financial System (2024), “Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and
Supervisors”, July.
28
Network for Greening the Financial system (2024), “Climate change, the macroeconomy and monetary policy”, October.
29
Financial Stability Board (2024) “Achieving Consistent and Comparable Climate-Related Disclosures 2024 Progress Report”, November.

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Chapter III Regulatory Initiatives in the Financial Sector

governance and oversight of fraud risk management The PCA Framework shall be applicable to all UCBs
in the REs. The directions emphasise the need under Tier 2, Tier 3 and Tier 4 categories except
for instituting robust internal audit and controls UCBs under All Inclusive Directions. Tier 1 UCBs,
framework in the REs and also provide a revised though not covered under the PCA Framework as
framework for early warning signals (EWS) and red of now, shall be subject to enhanced monitoring
flagging of accounts (RFA) for early detection of under the extant supervisory framework.
frauds. The directions aim to reduce the number of
III.3.3 Treatment of Wilful Defaulters and Large
incidences and the impact of fraudulent activities
Defaulters
by better equipping institutions to respond to
fraud risks with both preventative and corrective 3.22 The RBI has come out with a comprehensive
measures. The Reserve Bank’s focus on fraud risk guideline outlining the regulatory framework
management aligns with its broader efforts to and procedures for classification of borrowers as
enhance financial stability and resilience in an wilful defaulters to reinforce the accountability
increasingly digital and interconnected economy of defaulting borrowers and strengthen risk
thereby enhancing customer trust and protecting management frameworks of banks. The directions
the financial sector’s integrity. will play a crucial role in maintaining the integrity
of the financial system through transparent
III.3.2 Prompt Corrective Action (PCA) Framework
mechanism for identification and classification
for Primary (Urban) Co-operative Banks (UCBs)
of wilful defaulters, incorporating principles
3.21 On a review of the existing Supervisory of natural justice, specifying measures and
Action Framework (SAF) for UCBs, a revised consequences for those borrowers who deliberately
framework under the nomenclature “Prompt default on their financial obligations, reporting
Corrective Action (PCA) Framework” has been and dissemination of credit information on large
devised by the RBI to enable early supervisory defaulters and preventive measures through proper
intervention at an appropriate time, requiring credit appraisal and monitoring end use of funds.
the UCBs to initiate and implement remedial
III.3.4 Cyber Resilience and Digital Payment
measures in a timely manner, to restore financial
Security Controls for Non-Bank Payment System
health. Under this framework, UCBs that breach
Operators
certain risk thresholds based on capital adequacy,
asset quality and/or profitability are placed under 3.23 In order to ensure that the authorised non-
corrective action plan. This plan includes, inter bank payment system operators (PSOs) are resilient
alia, restrictions on expansion of size of the to existing and emerging information systems and
balance sheet and capital investments, reduction cyber security risks, the RBI issued directions on
in exposure to high risk-bearing assets and other ‘Cyber Resilience and Payment Security Controls’
operational constraints to restore financial health. for non-bank PSOs that focus on enhancing the
The PCA framework does not preclude RBI from security of digital payment systems in the face
taking any other action as it deems fit at any time of growing cyber threats. These directions aim to
in addition to the corrective actions prescribed improve safety and security of the payment systems
in the framework. The provisions of the PCA operated by PSOs by providing a framework for
framework will be effective from April 1, 2025. overall information security preparedness covering,

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inter alia, governance controls, information security III.3.6 Irregular Practices in Gold Loans
measures and digital payment measures, with an
3.26 To address the non-adherence to prudential
emphasis on cyber resilience.
guidelines by the supervised entities (SEs) in
3.24 These directions outline mandatory ‘Cyber grant of loans against pledge of gold ornaments
Crisis Management Plan’ (CCMP) to detect, contain, and jewellery, the RBI has advised SEs to
respond and recover from cyber threats and cyber comprehensively review their policies, identify
attacks. They also specify the minimum information gaps and implement corrective measures within
security standards for PSOs in areas, such as a specified timeframe. The guidelines assume
identity and access management, network security, importance in the wake of the significant growth in
vendor risk management, business continuity plan the gold portfolio in certain SEs and identified gaps
and cloud security. This initiative also addresses like, inter alia, deficiencies in use of third-parties
the rising reliance on digital payment services, for outsourcing, discrepancies in gold valuation,
requiring PSOs to adhere to digital payment inadequate due diligence and insufficient
controls in mobile and card payments. These monitoring of the end use of loan funds.
security measures aim to protect consumers from
III.3.7 Recognition of Central Counterparties by
fraud and ensure trust in digital financial services.
Foreign Regulators
III.3.5 Scheme for Trading and Settlement
3.27 The issues of extraterritoriality of certain
of Sovereign Green Bonds (SGrBs) in the
foreign regulations concerning domestic central
International Financial Services Centre (IFSC) in
counterparties (CCPs), the derecognition (or the
India
lack of recognition) of Indian CCPs by foreign
3.25 With a view to facilitate wider non-resident regulators and how such regulations can create
participation in SGrBs, a scheme for investment and liquidity inefficiencies and disrupt domestic
trading in SGrBs by eligible foreign investors in IFSC financial stability have been of concern. To address
has been notified by the RBI in consultation with these issues, the RBI has been engaging with
the Government and the International Financial foreign regulatory bodies, including the European
Services Centres Authority (IFSCA). This scheme Securities and Markets Authority (ESMA).
outlines the eligibility of investors, securities
III.3.8 Strengthening of Foreign Portfolio
eligible for investment, guidelines for participation
Investors Norms
in primary and secondary markets, trading and
settlement procedure and reporting requirements. 3.28 To guard against possible circumvention of
At present, foreign portfolio investors (FPIs) minimum public shareholding (MPS) norms, the
registered with the SEBI are permitted to invest in SEBI has mandated disclosure of granular details
SGrBs. This scheme shall facilitate easier access for of all entities holding any ownership, economic
non-resident investors to invest and trade in SGrBs interest or control in an FPI, on a full look through
through the IFSC, thereby enhancing global climate basis, without any threshold, by FPIs that fulfil
capital flows into India. any of the following criteria: (a) holding more than

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Chapter III Regulatory Initiatives in the Financial Sector

50 per cent of their Indian equity AUM in a single expressly or impliedly, in respect of or related to a
Indian corporate group, or (b) individually, or along security or securities, unless the person has been
with their investor group (in terms of Regulation permitted by the SEBI to make such a claim.
22(3) of the FPI Regulations, 2019), holding more
3.31 Entities regulated by the SEBI, including
than ₹25,000 crore of equity AUM in the Indian
recognised stock exchanges, clearing corporations
market.
and depositories, must ensure that neither they
III.3.9 Association of Persons Regulated by nor their agents engage in the prohibited activities
the SEBI and their Agents with Certain Persons without the necessary permissions. Additionally,
(‘Finfluencers’)
the SEBI registered entities, which are also
3.29 The significant online presence of regarded as ‘finfluencers’, are already subject to the
‘finfluencers30’ provides them the ability to advertisement code established by the SEBI, stock
influence the financial decisions of their followers. exchanges and the relevant regulatory authorities.
These activities fall within the purview of multiple
III.3.10 Valuation of Additional Tier 1 Bonds
regulatory bodies, however, most ‘finfluencers’
(‘AT-1 Bonds’)
are neither registered with any of the financial
sector regulator nor authorised under the SEBI’s 3.32 According to the framework for valuation of
Regulations to offer advice or recommendations bonds with multiple call options laid down in the
regarding securities falling under the purview of SEBI Master Circular for Mutual Funds, valuation
the SEBI. of perpetual bonds held by MFs is required to be
3.30 In this context, the SEBI has recently brought done at the lowest of the value obtained by valuing
out amendments to the SEBI (Intermediaries) the bond to various call dates and valuing to the
Regulations, 2008, Securities Contracts (Regulation) maturity date (the deemed maturity of perpetual
(Stock Exchanges and Clearing Corporations) bonds has been specified as 100 years from the date
Regulations, 2018 and the SEBI (Depositories and of issuance of the bond). Additionally, mutual funds
Participants) Regulations, 2018, which now provide have been permitted to value AT-1 bonds held by
that persons regulated by the SEBI (including them on Yield-to-Call basis. For all other purposes,
recognised stock exchanges, clearing corporations deemed maturity of all perpetual bonds continues
and depositories) and agents of such persons shall to be in line with the SEBI Master Circular.
not have any direct or indirect association with
III.3.11 Measures to Strengthen Equity Index
another person31 who: (a) provides advice or any
Derivatives Framework
recommendation, directly or indirectly, in respect
of or related to a security or securities, unless the 3.33 The SEBI introduced several measures to
person is registered with or otherwise permitted by strengthen Equity Index Derivatives Framework for
the SEBI to provide such advice or recommendation; increased investor protection and market stability in
or (b) makes any claim of returns or performance, October 2024 in view of increased retail participation

30
Financial influencers, commonly known as ‘finfluencers’, are individuals who provide information, advice, or recommendations on various financial
topics, such as investing in securities, personal finance, banking products, insurance and real estate, through engaging content on digital platforms like
Instagram, Facebook, YouTube, LinkedIn and X (erstwhile Twitter).
31
The term “another person” does not include those involved in investor education, as long as they do not participate in the specified prohibited
activities.

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 Financial Stability Report December 2024

in equity derivatives and heightened speculative average daily delivery value since the last review),
trading volumes in index derivatives on the day of respectively. If a stock in derivatives segment fails
expiry. to meet any of the above criteria for a continuous
3.34 To ensure continued suitability and period of three months, on a rolling basis, based
appropriateness of index derivatives segment for on the data for previous six months, it shall exit
investors, the minimum contract size for index from the derivatives segment. Further, an additional
derivatives at the time of introduction has been criterion of product success framework (PSF) was
increased to ₹15 lakh from existing ₹5 lakh. Further, introduced for evaluating stocks for exit from the
the contract size shall be fixed in such a manner derivatives segment.
that the value of the derivative contract would be
III.3.13 Review of Stress Testing Framework for
in the range of ₹15 lakh to ₹20 lakh (from existing
Equity Derivatives Segment
range of ₹5 lakh to ₹10 lakh). To address heightened
activity in index options on expiry day, weekly index 3.36 New stress testing methodologies were
derivatives products have been rationalised, tail adopted to get a better understanding and
risk coverage on the day of options expiry has been measurement of the prevalent tail risk in the equity
increased through increase in the margin, calendar derivatives segment and accordingly, determine the
spread benefit for options on the expiry day has been size of the default fund of clearing corporations
discontinued and intraday monitoring of existing in the equity derivatives segment. Additionally,
position limits at entity level has been stipulated keeping in view the increased funding needs of
in addition to the existing end of day monitoring. clearing corporations post adoption of new stress
Lastly, upfront collection of option premium from testing methodologies in the equity derivatives
options buyers has been mandated to ensure basic segment, provisions were incorporated for inter-
risk hygiene. segment transfer of SGF from equity cash to equity
III.3.12 Review of Eligibility Criteria for Entry/Exit derivatives segment and staggered contribution to
of Stocks in Derivatives Segment the core SGF of equity derivatives segment.
3.35 With an objective to ensure that only high- III.3.14 Monitoring of Position Limits for Equity
quality stocks with sufficient market depth are Derivatives Segment
allowed to trade in the equity derivatives segment,
3.37 In October 2024, the SEBI announced an
the SEBI revised the eligibility criteria for entry/exit
upward revision in the position limits for trading
of stocks in the segment in August 2024. The stock’s
members in the index futures and options contracts,
median quarter sigma order size (MQSOS), stock’s
market wide position limit (MWPL) and the stock’s cumulatively for client and proprietary trades,
average daily delivery value (ADDV) in the cash set at ₹7,500 crore or 15 per cent of the total open
market, over the previous six months, on a rolling interest (OI) in the market, whichever is higher, from
basis, were raised from ₹25 lakh to ₹75 lakh (due the earlier mandate of ₹500 crore or 15 per cent of
to significant rise in the average market turnover), the total OI in the market. The position limits will
₹500 crore to ₹1,500 crore (on account of surge in be applicable for index futures and index options
market capitalisation since the last review) and separately and the revised limits are effective
₹10 crore to ₹35 crore (owing to over 3x increase in immediately.

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3.38 The SEBI also decided that in line with the promoter group or any related party, from the
practice in currency derivatives segment, starting issue proceeds, whether directly or indirectly; and
April 2025, positions of market participants in the g) related party transaction norms, as applicable to
equity derivatives segment (index and stocks) shall listed entities on Main Board, has been extended to
be monitored based on the previous day’s open SME listed entities, provided that the threshold for
interest of the overall market. considering related party transactions as material
shall be 10 per cent of annual consolidated
III.3.15 Review of Small and Medium Enterprises
turnover or ₹50 crore, whichever is lower.
(SME) framework
III.3.16 Cybersecurity and Cyber Resilience
3.39 With the objectives of strengthening the
Framework (CSCRF) for the SEBI Regulated
framework for public issues by SMEs and to facilitate
Entities
SMEs having a sound track-record raise funds from
the public and get listed on stock exchanges, and to 3.41 To ensure robust cybersecurity measures
protect the interests of investors in the SMEs, the for protection of IT infrastructure and data at
SEBI has approved amendments to the SEBI (ICDR) its REs, the Cybersecurity and Cyber Resilience
Regulations, 2018 and the SEBI (LODR) Regulations, Framework (CSCRF) was issued by the SEBI. The
2015. primary objectives of CSCRF are to: (a) enhance
cybersecurity at REs by establishing cybersecurity
3.40 Key changes brought out by the amendments
standards and guidelines with graded approach;
are: a) an SME issuer shall make an IPO, only if
(b) facilitate risk management by providing
the issuer has an operating profit (earnings before
comprehensive risk assessment guidelines to
interest, depreciation and tax) of ₹1 crore from
identify, assess and mitigate cybersecurity risks in
operations for any two out of the previous three
a streamlined manner; (c) promote cyber resilience
financial years at the time of filing of its draft red
at REs by developing capabilities to not only defend
herring prospectus; b) offer for sale (OFS) by selling
against cyber-attacks but also to recover swiftly from
shareholders in SME IPO shall not exceed 20 per
incidents and minimise disruption to securities
cent of the total issue size and selling shareholders
market operations; (d) enhance efficient audits
cannot sell more than 50 per cent of their holding;
and compliance; and (e) encourage REs to adopt a
c) lock-in on promoters’ holding held in excess of
culture of continuous improvement and vigilance
minimum promoter contribution will be released
in cybersecurity practices and to stay updated with
in phased manner after one year; d) allocation
evolving cyber threats and technologies.
methodology for non-institutional investors (NIIs)
in SME IPOs has been aligned with methodology 3.42 The CSCRF has laid down detailed guidelines
used for NIIs in Main Board IPOs; e) amount for that outline the responsibilities of REs, including
General Corporate Purpose in SME IPO shall be board-level oversight, accountability of REs’ MD/
capped to 15 per cent of amount being raised by CEO, appointment of chief information security
the issuer or ₹10 crore, whichever is lower; f) SME officer (CISO), composition of IT Committee for REs
issues shall not be permitted, where objects of the and other governance measures with operational
issue consist of repayment of loan from promoter, controls. It also mandates regular cyber audit and

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 Financial Stability Report December 2024

risk assessment to identify vulnerabilities and constantly monitor the performance and efficiency
enhance the security posture, including a ‘Cyber of its surveillance related functions.
Capability Index’ (CCI) to help REs assess their III.3.18 Upstreaming of Clients’ Funds by
cyber resilience on a periodic basis. Further, the Stock Brokers/ Clearing Members to Clearing
CSCRF has mandated scenario-based cybersecurity Corporations
drills to handle real world threat scenarios to
3.45 To protect the funds of investors from
improve preparedness and strengthen cybersecurity
being misused by stock brokers (SBs), such as using
capabilities.
funds received from their clients to create Fixed
III.3.17 Framework of Financial Disincentives Deposit Receipts (FDRs) and place such FDRs with
for Surveillance Related Lapses at Market the banks for obtaining Bank Guarantee (BG), the
Infrastructure Institutions (MIIs) SEBI has introduced a framework under which
3.43 MIIs (i.e., stock exchanges, clearing stock brokers and clearing members (CMs) shall
upstream all client funds to clearing corporations
corporations and depositories), which are
(CCs) to ensure that no client funds are retained by
systemically important institutions in the Indian
SBs/CMs.
securities market and are the first level regulators,
need to be well equipped to detect market abuse, 3.46 Under this framework, SBs and CMs must
including new modus operandi that could be upstream all clear credit balances of clients to CCs
adopted by unscrupulous elements, and take on an end-of-day basis wherein the client funds
prompt preventive and effective action against which are not required for meeting margin or
such activities. settlement obligations must be transferred to CCs
daily. Upstreaming can be done in three forms: (a)
3.44 In view of certain surveillance related lapses
cash; (b) lien on FDRs created out of clients’ funds;
observed at MIIs, the SEBI has implemented a
and (c) pledge of units of Mutual Fund Overnight
framework that would be applicable to surveillance
Schemes (MFOS) created out of clients’ funds. Any
related lapses emanating from non-adherence
clear credit balance that could not be upstreamed
to (a) the requisite surveillance activities or (b) to CCs due to receipt of funds from clients
decisions taken in the surveillance meetings held beyond cut-off time shall necessarily remain in Up
with the SEBI, and do not involve any subjective Streaming Client Nodal Bank Account (USCNBA)
discretionary deviations or discretionary value until it is upstreamed to CC on the next day. Any
judgments. The number of financial disincentives FDRs shall be created only with banks which satisfy
for such lapses is determined based on total the CCs’ exposure norms as specified by the CCs/
annual revenue of the MII (an indicator of the size SEBI from time to time. FDRs shall be created only
and impact of the MII on the market ecosystem) from USCNBA and tenure of such FDRs shall not be
during the previous financial year and the number more than one year. Further, every FDR created out
of instances of surveillance related lapses during of clients’ funds shall necessarily be always lien-
the current financial year. The framework is marked to one of the CCs. This framework is meant
intended to encourage an MII to be proactive in to enhance investor protection, promote market
its surveillance related functions and perform the integrity and ensure that client funds are invested
surveillance activities with utmost efficiency and to in low-risk or risk-free products.

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Chapter III Regulatory Initiatives in the Financial Sector

III.3.19 Specific Due Diligence of Investors and III.3.20 Institutional Mechanism by Asset
Investments of Alternative Investment Funds Management Companies (AMCs) for Deterrence
(AIFs) of Potential Market Abuse

3.47 AIFs play a crucial role in connecting 3.49 To address instances of market abuse
sophisticated investors, having increased risk including front running and fraudulent
appetite, with companies in need of risk capital. transactions in securities, the existing regulatory
AIFs have a relatively light touch regulatory framework, viz., the SEBI (Mutual Funds)
framework vis-à-vis other the SEBI registered Regulations, 1996 has been amended, under which
investment channels, such as mutual funds (MFs) AMCs are required to put in place a structured
and portfolio management services (PMS). While institutional mechanism for identification
this offers flexibility of operations to AIFs, in the and deterrence of potential market abuse in
securities. The said amendments aim to a) enhance
past few years, there have been some instances of
responsibility and accountability of management
AIFs facilitating circumvention of extant financial
of AMCs for such an institutional mechanism; and
sector regulations, such as (a) facilitating ever-
b) foster transparency by requiring AMCs to have a
greening of stressed loans of regulated lenders; (b)
whistle blower mechanism.
facilitating investors, who are otherwise ineligible
to become Qualified Institutional Buyers, in getting 3.50 The SEBI has also specified the broad
allotments in public offers as QIBs; (c) facilitating framework for implementation of the aforesaid
investors, who are otherwise ineligible to become institutional mechanism, consisting of enhanced
Qualified Buyers, in subscribing to Security surveillance systems, internal control procedures
Receipts as Qualified Buyers in circumvention of and escalation processes, such that the overall
SARFAESI Act, 2002; and (d) AIFs with domestic mechanism is able to identify, monitor and
address specific types of misconduct, including
manager/sponsor, investing money received
front running, insider trading, misuse of sensitive
from predominantly foreign investors, to bypass
information, among other things. The requirements
applicable norms governing various routes of
related to alert generation and monitoring, reporting
foreign investment.
and periodic review at the end of AMCs have also
3.48 Accordingly, the SEBI has prescribed been specified. To ensure uniform implementation
a framework to specify the broad principles of the institutional mechanism across the industry,
that AIFs need to adhere to, so as to address the Association of Mutual Funds in India (AMFI)
the circumventions, under which a set of has issued detailed implementation standards, in
implementation standards has been formulated consultation with the SEBI, which shall mandatorily
to specify the due-diligence checks to be carried be followed by all AMCs.
out by the specified narrow-based funds. The III.3.21 Use of Artificial Intelligence in the
due diligence is to be carried out with respect Financial Sector
to investors and investments of the AIF, prior to 3.51 Rapid technological advancements and
making an investment, to prevent facilitation of adoption of new technologies offer benefits and
the identified circumventions. Adherence to these create risks to the financial system. Consequently,
standards by AIFs would result in enhanced trust financial sector regulators and supervisors are
of investors and all other stakeholders in this asset reinforcing their efforts to strengthen regulation
class in the long run. and oversight to address potential financial

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 Financial Stability Report December 2024

stability risks from emerging technologies. The Table 3.1: Category of Complaints Received under the RB-IOS, 2021
RBI constituted a Committee in December 2024 to Sr. Grounds of Complaint April-June July-Sept
develop a Framework for Responsible and Ethical No. 2024 2024

Enablement of AI (FREE-AI) in the financial sector, Number Share Number Share

(per (per
comprising of experts from diverse fields. The cent) cent)
Committee will assess the current level of adoption 1 Loans and Advances 22,534 29.68 22,436 30.69
of AI in financial services (globally and in India), 2 Mobile / Electronic 14,401 18.97 12,744 17.43
identify potential risks associated with AI and Banking

recommend evaluation, mitigation and monitoring 3 Opening / Operation of 12,998 17.12 12,858 17.59
Deposit accounts
framework for financial institutions. In the securities
4 Credit Card 11,977 15.78 12,172 16.65
market, the SEBI has advised market infrastructure
5 Other products and 5,502 7.25 4,996 6.83
institutions and registered intermediaries who use services*
AI tools, either designed by them or procured from 6 ATM / CDM / Debit card 5,416 7.13 4,867 6.66

third party technology service providers, to take full 7 Para-Banking 1,175 1.55 1,051 1.44

responsibility for their use of such tools, irrespective 8 Remittance and Collection 950 1.25 933 1.28
of instruments
of the scale of adoption and ensure privacy, security
9 Pension related 731 0.96 760 1.04
and integrity of investors’ data. 10 Notes and Coins 106 0.14 90 0.12
11 Other products and 125 0.16 191 0.26
III.4 Other Developments
services*
III.4.1 Customer Protection Total 75,915 100.00 73,098 100.00
Note: * includes bank guarantee/ letter of credit, customer
3.52 The number of complaints received by the confidentiality, premises and staff, grievance redressal, death/ missing
Offices of the Reserve Bank of India Ombudsman claims etc.
Source: RBI.
(ORBIOs) for the previous two quarters indicates
that complaints pertaining to loans and advances REs (five PSBs; five PVBs; three foreign banks, two
and payment modes (i.e., complaints pertaining to RRBs, 116 co-operative banks; 14 NBFCs and eight
mobile/ electronic banking, credit card and ATM/ HFCs) and imposed an aggregate penalty of ₹29.64
CDM/ debit card) continue to constitute over 70 per crore for non-compliance with/contravention of
cent of the total number of complaints during Q1 statutory provisions and/ or directions issued by
and Q2 of 2024-25 (Table 3.1). the Reserve Bank.
3.53 With the rise in digital transactions, the 3.55 During H1:2024-25, the SEBI has undertaken
incidents of cyber frauds using novel modus 461 enforcement actions, which included 452
operandi have increased in recent times. prohibitive directions (Final and Interim orders),
Considering the fact that the financial losses and cancellations of certificates of registration of five
emotional distress caused by these frauds are market intermediaries, prohibition on taking
substantial, it is imperative that REs undertake up new assignment/clients on three market
wide scale preventive awareness initiatives to intermediaries and one warning issued against
caution the public about such frauds and intensify an intermediary. Penalties amounting to ₹36.58
efforts to identify mule accounts. crore have been imposed against 297 entities while
there have been five cancellations of certification
III.4.2 Enforcement
of registration and prohibition on taking up new
3.54 During June 2024 to November 2024, the assignment/ clients on three entities during the
Reserve Bank imposed monetary penalty on 153 period H1:2024-25.

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Chapter III Regulatory Initiatives in the Financial Sector

Table 3.2: Coverage of Deposits

(Amount in ₹crore and No. of Accounts in crore)

Sr. Percentage Variation

Item Sep 30, 2023 Mar 31, 2024 Sep 30, 2024
No. (3) over (2) (4) over (3)
(1) (2) (3) (4) (5) (6)
(A) Number of Registered Banks 2009 1997 1989
(B) Total Number of Accounts 287.9 289.7 293.7 0.6 1.4
(C) Number of Fully Protected Accounts 281.8 283.3 286.9 0.5 1.3
(D) Percentage (C)/(B) 97.9 97.8 97.7
(E) Total Assessable Deposits 2,04,18,707 2,18,52,160 2,27,26,920 7.0 4.0
(F) Insured Deposits 90,32,340 94,12,705 96,74,620 4.2 2.8
(G) Percentage (F)/(E) 44.2 43.1 42.6
Source: DICGC.

III.4.3 Deposit Insurance 3.57 With the present deposit insurance limit of
₹5 lakh, 97.7 per cent of the total number of deposit
3.56 The Deposit Insurance and Credit Guarantee
accounts (293.7 crore) were fully insured and 42.6
Corporation (DICGC) extends insurance cover
per cent of the total value of all assessable deposits
to depositors of all the banks operating in India.
(₹227.3 Lakh crore) was insured as on September
As on September 30, 2024, the number of banks
30, 2024 (Table 3.2).
registered with the DICGC was 1989, comprising 139
commercial banks (including 11 small finance banks, 3.58 The insured deposits ratio (i.e., the ratio of
six payment banks, 43 regional rural banks, two insured deposits to assessable deposits) was higher
local area banks) and 1850 co-operative banks. The for cooperative banks (63.1 per cent), followed
Deposit Insurance Fund (DIF) with the Corporation by commercial banks (41.5 per cent) (Table 3.3).
recorded a year-on-year growth of 16.9 per cent to Within commercial banks, PSBs have higher insured
reach ₹2.14 lakh crore at end-September 2024. deposit ratio vis-à-vis PVBs.

Table 3.3: Bank Group-wise Deposit Protection Coverage (as on September 30, 2024)
(₹crore)

Bank Groups No. of Insured Insured Deposits Assessable Deposits IDR

Banks (ID) (AD) (ID/AD, per cent)
I. Commercial Banks 139 89,34,151 2,15,53,399 41.5
i) Public Sector Banks 12 57,93,657 1,19,84,450 48.3
ii) Private Sector Banks 21 24,76,339 75,95,372 32.6
iii) Foreign Banks 44 49,158 10,86,877 4.5
iv) Small Finance Banks 11 98,498 2,41,745 40.7
v) Payment Banks 6 18,375 18,470 99.5
vi) Regional Rural Banks 43 4,97,161 6,25,151 79.5
vii) Local Area Banks 2 962.2345 1,334 72.1
II. Cooperative Banks 1,850 7,40,469 11,73,521 63.1
i) UCBs 1,465 3,73,712 5,56,868 67.1
ii) SCCBs 33 63,262 1,47,586 42.9
iii) District Central Cooperative Banks 352 3,03,496 4,69,067 64.7
Total 1,989 96,74,620 2,27,26,920 42.6
Note: 1. IDR: Insured Deposit Ratio is calculated as Insured Deposit divided by Assessable Deposit.
2. The insured deposits to assessable deposits ratio may not tally due to rounding off.
Source: DICGC

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 Financial Stability Report December 2024

Table 3.4: Deposit Insurance Premium Table 3.5: Deposit Insurance Fund and Reserve Ratio
(₹crore) (₹crore)
Commercial Co-operative As on Deposit Insurance Insured Reserve Ratio
Period Total
Banks Banks Fund (DIF) Deposits (DIF/ID)
2023-24: HY1 10,962 666 11,628 (ID) (Per cent)
2023-24: HY2 11,581 670 12,251 Sep 30, 2023 1,82,701 90,32,340 2.02
2024-25: HY1 12,408 719 13,127 Mar 31, 2024 1,98,753 94,12,705 2.11
Source: DICGC. Sep 30, 2024 2,13,513 96,74,620#
2.21
Note: #Provisional.
Source: DICGC.

3.59 Deposit insurance premium received by the III.4.4 Corporate Insolvency Resolution Process
DICGC grew by 12.9 per cent (y-o-y) to ₹13,127 crore (CIRP)
during H1:2024-25, of which, commercial banks
3.61 Since the provisions relating to the corporate
had a share of 94.5 per cent (Table 3.4).
insolvency resolution process (CIRP) came into
3.60 The DIF with the DICGC is primarily built out
force in December 2016, a total of 8002 CIRPs were
of the premium paid by insured banks, investment
initiated till September 2024 (Table 3.6), out of
income and recoveries from settled claims, net of
which 6039 (75.5 per cent) have been closed. Of
income tax. The DIF recorded a 16.9 per cent year-
on-year increase to reach ₹2.14 lakh crore as on the closed CIRPs, around 20.2 per cent have been
September 30, 2024. The reserve ratio (i.e., ratio of closed on appeal or review or settled, 18.5 per cent
DIF to insured deposits) increased to 2.21 per cent have been withdrawn, around 43.5 per cent have
from 2.02 per cent a year ago (Table 3.5). ended in orders for liquidation and 17.7 per cent

Table 3.6: Corporate Insolvency Resolution Process (as on September 30, 2024)

Year/Quarter CIRPs at the Admitted Number of Closure by CIRPs at the

beginning of end of the
Appeal/ Withdrawal Approval of Commencement
the Period Period
Review/ under Section RP of Liquidation
Settled 12A
2016 - 17 0 37 1 0 0 0 36
2017 - 18 36 707 95 0 18 91 539
2018 - 19 539 1157 158 97 75 305 1061
2019 - 20 1061 1991 348 220 132 537 1815
2020 - 21 1815 536 92 168 119 349 1623
2021 - 22 1623 891 125 200 143 340 1706
2022 - 23 1706 1262 189 229 187 406 1957
2023 - 24 1957 1004 157 167 270 442 1925
Apr - Jun, 2024 1925 234 35 19 70 80 1955
July – Sept, 2024 1955 183 21 20 54 80 1963
Total NA 8002 1221 1120 1068 2630 1963
Note: These CIRPs are in respect of 7639 Corporate Debtors. This excludes 1 Corporate Debtor which has moved directly from Board for Industrial
and Financial Reconstruction (BIFR) to resolution.
Source: Insolvency and Bankruptcy Board of India (IBBI).

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Chapter III Regulatory Initiatives in the Financial Sector

Table 3.7: Sectoral Distribution of CIRPs (as on September 30, 2024)

Sector Number of CIRPs

Admitted Closed Ongoing
Appeal/ Withdrawal Approval Commencement Total
Review/ under of RP of Liquidation
Settled Section 12 A
Manufacturing 2990 420 433 500 1070 2423 567
Food, Beverages & Tobacco Products 386 46 57 59 145 307 79
Chemicals & Chemical Products 326 56 64 51 98 269 57
Electrical Machinery & Apparatus 212 27 23 28 95 173 39
Fabricated Metal Products 157 25 28 22 50 125 32
Machinery & Equipment 326 59 57 39 107 262 64
Textiles, Leather & Apparel Products 506 61 75 68 212 416 90
Wood, Rubber, Plastic & Paper Products 352 47 50 62 119 278 74
Basic Metals 495 61 45 129 179 414 81
Others 230 38 34 42 65 179 51
Real Estate, Renting & Business Activities 1746 321 272 165 479 1237 509
Real Estate Activities 504 101 74 49 76 300 204
Computer and related activities 225 29 41 17 87 174 51
Research and Development 11 2 3 1 2 8 3
Other Business Activities 1006 189 154 98 314 755 251
Construction 934 182 148 123 198 651 283
Wholesale & Retail Trade 809 105 79 71 349 604 205
Hotels & Restaurants 165 30 27 30 41 128 37
Electricity & Others 219 28 21 47 87 183 36
Transport, Storage & Communications 219 25 25 22 92 164 55
Others 920 110 115 110 314 649 271
Total 8002 1221 1120 1068 2630 6039 1963
Note: The distribution is based on the CIN of corporate debtors and as per National Industrial Classification (NIC 2004).
Source: Insolvency and Bankruptcy Board of India (IBBI).

have ended in approval of resolution plans (RPs) 3.62 The outcome of CIRPs as on September 30,
(Table 3.7). A total of 1963 CIRPs (24.5 per cent) are 2024, shows that out of the operational creditor
ongoing. initiated CIRPs that were closed, 52 per cent were
closed on appeal, review, or withdrawal (Table 3.8).
Table 3.8: Outcome of CIRPs, Initiated Stakeholder-wise (as on September 30, 2024)

Number of CIRPs initiated by

Outcome Description Financial Operational Corporate
FiSPs Total
Creditor Creditor Debtor
Closure by Appeal/Review/Settled 374 837 10 0 1221
Closure by Withdrawal u/s 12A 328 784 8 0 1120
Status of Closure by Approval of RP 633 353 78 4 1068
CIRPs Closure by Commencement of Liquidation 1224 1132 274 0 2630
Ongoing 1147 706 110 0 1963
Total 3706 3812 480 4 8002

CIRPs Realisation by FCs as per cent of Liquidation Value 174.2 129.7 146.3 134.9 161.1
yielding Realisation by FCs as per cent of their Claims 30.9 25.0 18.1 41.4 31.0
RPs Average time taken for Closure of CIRP (days) 704 714 572 677 698

CIRPs yielding Liquidation Value as per cent of Claims 5.5 8.9 8.4 - 6.3
Liquidations Average time taken for Closure of CIRP (days) 508 504 442 - 499
Note: FiSPs = Financial service providers. A “Financial service provider” means a person engaged in the business of providing financial services
(other than banks) in terms of authorisation issued or registration granted by a financial sector regulator.
Source: Insolvency and Bankruptcy Board of India (IBBI).

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 Financial Stability Report December 2024

3.63 The primary objective of the Insolvency and resolution plans. Creditors have realised around
Bankruptcy Code (hereinafter referred as “Code”) 161 per cent of liquidation value and 86 per cent of
is rescuing corporate debtors in distress. The Code fair value. The haircut for creditors relative to the
has rescued 3409 corporate debtors (1068 through fair value of assets was around 14 per cent, while
resolution plans, 1221 through appeal or review
relative to their admitted claims is around 69 per
or settlement and 1120 through withdrawal) till
cent. Furthermore, realisable value through RPs
September 2024. It has referred 2630 corporate
debtors for liquidation. Several initiatives are does not include (a) possible realisation through
being taken to improve the outcomes of the corporate and personal guarantors and recovery
Code, including monitoring of cases pending for against avoidance transactions; (b) the CIRP cost;
admission and ongoing CIRPs. Further, the IBBI and (c) other probable future realisations, such
revised its mechanism for real-time information as increase in value of diluted equity and funds
sharing regarding applications for the initiation infused into the corporate debtor, including capital
of CIRP with the Information Utility (IU). These
expenditure by the resolution applicants. About 40
initiatives have had a substantial impact on the IBC
per cent of the CIRPs that yielded RPs were defunct
process, as evidenced by the increase in the NCLT-
companies. In these cases, the claimants have
approved resolutions and the admission of cases
initiated by Financial Creditors (FCs). The number realised 150 per cent of the liquidation value and
of cases ending with resolution vis-à-vis cases in 19 per cent of their admitted claims.
which liquidation is ordered shows an increasing 3.65 As a result of the behavioural change
trend (Chart 3.1).
effectuated by the Code, many debtors are
3.64 Cumulatively till September 30, 2024, settling their dues before the start of insolvency
creditors have realised ₹3.55 lakh crore under the proceedings. Till March 2024, 28,818 applications
Chart 3.1: Summary of Outcomes - Resolution to Liquidation ratio
for initiation of CIRPs of corporate debtors, having
underlying default of ₹10.22 lakh crore, were
withdrawn before their admission.

3.66 At end-September 2024, the total number

of CIRPs ending in liquidation was 2630, of which
final reports have been submitted for 1113 CDs.
These corporate debtors together had outstanding
claims of ₹3.25 lakh crore, but the assets were
valued at only ₹0.13 lakh crore. The liquidation of
these companies resulted in 87 per cent realisation
Source: Insolvency and Bankruptcy Board of India (IBBI).
of the liquidation value.

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Chapter III Regulatory Initiatives in the Financial Sector

III.4.5 Developments in International Financial billion in September 2020 to US$ 975.8 billion till
Services Centres (IFSC) end September 2024.

3.67 To provide world class regulatory 3.70 The India International Bullion Exchange
architecture to firms operating from the GIFT- (IIBX) has been formed with the intent of developing
IFSC, many new regulations and frameworks India as a vibrant gold trading hub for the national
which are aligned to international best practices and international markets. Three internationally
for regulating financial products, financial services recognised vault managers have established
and financial institutions in the IFSC, have been vaults at the IFSC with capacity of around 450
notified by the IFSCA since 2021. The total number tonnes for gold and around 3000 tonnes for silver.
of registrations/ authorisations given by the IFSCA Furthermore, the import of gold under UAE-India
reached 687 by the end of September 2024. CEPA through IIBX has commenced.

3.68 The number of Fund Management Entities 3.71 The IFSCA has developed a Single Window
(FMEs) registered in the IFSC has almost doubled IT System (SWITS) which would contribute to
from 65 in March 2023 to 128 in September 2024. improve the ease of doing business in the GIFT-
Also, the number of Alternative Investment Funds IFSC, by providing a common application form
(AIFs), which have been launched by these FMEs has (CAF), created by merging several existing forms
increased by more than 7 times from 24 in March including business-specific annexure forms. The
2022 to 173 in September 2024 with a total targeted SWITS aims to harmonise and simplify the process
corpus of US$ 40.6 billion. In terms of exchanges at of submission of application under various Acts
the IFSCA, the monthly turnover on the GIFT-IFSC administered by the IFSCA, in addition to the
Exchanges was US$ 102 billion and the average Special Economic Zones (SEZ) Act, 2005. Apart from
daily turnover of NIFTY derivative contracts on this, the SWITS also integrates within itself a no
the NSE International Exchange (NSE IX) was US$ objection certificate (NOC) processing module that
4.8 billion as at end-September 2024. A total of will ease the process of obtaining NOCs, wherever
US$ 63.9 billion debt securities had been listed on necessary, from the appropriate regulators, viz., the
the IFSC exchanges including US$ 14.8 billion of RBI, the SEBI and the IRDAI.
green bonds, social bonds, sustainable bonds and III.4.6 Pension Funds
sustainability-linked bonds till September 2024.
3.72 The National Pension System (NPS) and
3.69 The banking ecosystem at the GIFT-IFSC the Atal Pension Yojana (APY) have continued
comprises 28 banks (IFSC Banking Units), including to progress in terms of the total number of
12 foreign banks and 16 domestic banks offering subscribers and asset under management (AUM).
a wide spectrum of financial services. These IFSC As of September 30, 2024, in terms of number of
Banking Units (IBUs) are set up as branches in the subscribers, the NPS and the APY have shown a
GIFT-IFSC and have a whole-stack banking licence. growth of 6.50 per cent since March 2024, whereas
The total banking asset size of 28 IBUs is US$ 70.9 the asset under management (AUM) has recorded
billion as at end September 2024. The cumulative a growth of 14.06 per cent in the same period. The
banking transactions have grown from US$ 53 combined subscriber base under the NPS and the

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 Financial Stability Report December 2024

APY has reached 7.83 crore as at end September Chart 3.3: NPS and APY AUM: Asset Class-wise Bifurcation
(per cent of Total AUM)
2024, with an AUM of ₹13.3 lakh crore (Chart
3.2), which is primarily invested in fixed income
instruments (Chart 3.3).

3.73 Points of Presence (PoPs), the distribution

channel under the NPS, play an important role
in onboarding of subscribers under the NPS/ NPS
Vatsalya and providing them various services. There
has been a consistent growth in enrolment of new
subscribers through PoPs channel as well as strong
momentum in corporate sector onboarding. The
Source: PFRDA.
enrolment under the NPS private sector has seen
a growth of more than 55 per cent in the period have registered for the NPS until September 30,
(April to October 2024) in comparison to the same 2024. Furthermore, the PFRDA organises various
period in the previous financial year. During this campaigns and recognition programs to encourage
financial year, approximately 2100 new corporates and honor the efforts of PoPs officials who

Chart 3.2: NPS and APY – Subscribers and AUM Trend

Note: 1. * The total includes subscribers under NPS Vatsalya.

2. # The total also includes AUM from Tier II, TTS and NPS Vatsalya.
Source: PFRDA.

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Chapter III Regulatory Initiatives in the Financial Sector

significantly contribute to the NPS expansion. In III.4.7 Insurance

the current financial year, the ENRICH ELEVATE 3.75 The premium income for life insurance
ENROL – TRIPLE E campaign has been successfully sector has been consistently increasing aided by
completed. Moreover, to strengthen the distribution rising disposable income, regulatory reforms,
channel of the NPS, the PFRDA is engaging with promoting ease of doing business and rising
Fintechs to increase penetration through online awareness on the need of insurance, among other
mode and with regional rural banks (RRBs) to focus factors. The total insurance premium collected by
on the rural areas. life insurers increased to ₹3.99 lakh crore in April

3.74 In order to boost the enrolments and - September 2024 from ₹3.51 lakh crore in April –
September 2023, registering a growth rate of 13.7
expand the coverage under the NPS and the APY,
per cent growth (y-o-y). Similarly, new business
the following initiatives were taken: (a) the NPS
premium of life insurance industry grew by 19.5 per
Vatsalya has been launched which is a contributory
cent, reaching ₹1.89 lakh crore in April- September
pension scheme exclusively for minors with an
2024 from ₹1.58 lakh crore vis-à-vis April-
objective to create a pensioned society, emanating
September 2023. The general and health insurance
from the vision of “Viksit Bharat@2047”, and to
sector covers a wide range of non-life insurance
encourage empowerment of children. All minors
products, including motor, health, property, travel
who are citizens of India are eligible to participate
and liability insurance. The increased awareness
in the scheme on a voluntary basis. As of end-
of risk management and the need for financial
September 2024, 33,955 subscribers have been
protection has contributed to significant growth in
enrolled under the scheme; (b) in addition to the recent years, with the total premium underwritten
existing 3 life cycle funds, i.e., the Conservative by general and health insurers reaching ₹1.54
Life Cycle Fund (LC-25), the Moderate Life Cycle lakh crore in the current financial year (April -
Fund (LC-50), the Aggressive Life Cycle Fund (LC- September 2024), exhibiting a 7.0 per cent growth
75), a new life cycle fund namely the ‘Balanced (y-o-y). Among various lines of business, the health
Life Cycle Fund’ has been launched. This life cycle insurance segment (the largest among the non-life
fund is a predetermined mix of equity and debt insurance sector) has reported the highest growth
that balances the risk of ageing with market risk to of 8.95 per cent.
maximise the return under which equity allocation
3.76 As part of its shift towards principle-based
up to 50 per cent is maintained until the age of regulations, aimed to create a more flexible and
45. This is currently available to subscribers in the adaptive insurance sector, the IRDAI has issued a
private sector (All-Citizen Model and Corporate); comprehensive Master Circular on life insurance
and (c) to expand the coverage under the APY, business, superseding the provisions of previous
several outreach programs were conducted across circulars. The Master Circular covers the following
India in collaboration with the State Level Bankers’ important areas relating to the products offered and
Committees (SLBCs), the Lead District Managers policyholders: (a) insurers are mandated to have in
(LDMs) and other stakeholders, with 18 programs place a stronger product governance framework
completed by September 2024. requiring internal product management committees

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 Financial Stability Report December 2024

to closely monitor product development, pricing, insurance products, consolidating all relevant
and design; (b) introduction of a customer regulatory norms in one accessible location. This
information sheet (CIS) to present the policyholder Master Circular, which supersedes 55 Circulars,
the gist of the benefits and other terms and not only serves as a comprehensive guide for
conditions in a simplified manner; (c) mandating policyholders but also emphasises the need for a
policy loan facility for savings linked products; smoother, faster and more efficient claims process.
option of partial withdrawals for pension plans Key aspects covered include: (a) broader product

is introduced with greater flexibility in premium choices; (b) a simplified customer information
sheet (CIS); (c) flexibility for policyholders to choose
payments; (d) the free-look period to be extended
products that suit their needs; (d) encouraging
to 30 days, allowing customers more time to review
insurers to provide seamless and tech-driven
policy terms; (e) grievance redressal mechanisms
services targeting 100 per cent cashless claims
have been reinforced, prioritising prompt and
and ensure transparency with clear procedures for
transparent resolutions; and (f) various measures
claims; (e) renewability of policies strengthened,
to strengthen governance viz., initiatives targeted
with protections against denial except in cases
at reducing mis-selling, maintaining fair pricing
of fraud or misrepresentation; and (f) enhanced
practices, and strengthening product oversight — customer safeguards, which include stringent
all with the goal of increasing insurance penetration timelines for portability, cashless authorisations
and bolstering consumer confidence. and oversight of claim repudiations, ensuring
3.77 The IRDAI has also issued a comprehensive higher service standards and trust in the sector.
Master Circular for the general insurance sector, 3.79 Furthermore, in a broader effort to empower
replacing thirteen previous circulars, to simplify policyholders, the IRDAI has issued a Master Circular
and enhance customer-centric insurance solutions. on protection of policyholders which supersedes
Key aspects covered in the Master Circular are: 30 Circulars and provides a consolidated source for
(a) stringent timelines for settlement of claims policyholders’ rights and entitlements. It stresses
and flexibility in policy cancellations; (b) insurers the importance of transparent and efficient claims
mandated to provide ‘Pay as you drive’ / ‘Pay processing aiming to build trust within the sector.
as you go’ / ‘Pay as you use’ insurance cover and The Circular covers two main aspects viz., one
comprehensive cover including coverage for for policyholder guidance at various stages of an
insurance contract and another outlining regulatory
depreciation; and (c) insurers to ensure fair pricing,
compliance for insurers. Through these reforms,
robust governance and tech-enabled processes for
the IRDAI seeks to promote a more consumer-
seamless services. This shift allows customers to
centric insurance environment with emphasis on
have a wide range of tailored options, improving
greater transparency, ease of access and simplified
their ability to select products that best fit their
procedures, fostering a climate of trust and ensuring
needs and preferences, thereby enhancing the
that the insurance sector remains robust and well-
overall insurance experience.
aligned with evolving market needs, ultimately
3.78 For the health insurance sector, the IRDAI promoting a more inclusive and efficient insurance
has issued a dedicated Master Circular on health landscape in India.

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Chapter III Regulatory Initiatives in the Financial Sector

Summary and Outlook prepared to manage potential disruptions. As the

financial landscape continues to evolve, ongoing
3.80 In the midst of challenges posed by
collaboration and adaptability will be crucial for
emerging risks, global regulatory bodies have
maintaining a robust, secure and sustainable global
undertaken significant measures to address
financial ecosystem.
these challenges and strengthen the stability of
the financial system. Key efforts have focused 3.81 Domestic regulatory initiatives have
on mitigating the risks posed by technological concentrated on reinforcing the resilience of
advancements, including the rise of financial financial intermediaries and market infrastructure,
technology, the growing threat of cyberattacks preventing fraud and enhancing the protection of
and the increasing reliance on third-party service customers. Regulators have remained vigilant and
providers. Furthermore, regulators have prioritised responsive, adapting to the changing financial
enhancement of frameworks to bolster resilience, environment to further strengthen the robustness
ensuring that financial institutions are adequately of the financial system.

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Annex 1
Systemic Risk Survey

In the latest round of the Systemic Risk Survey, all major groups continued to remain in the medium risk
category. Global and institutional risks remained unchanged while financial market risks eased marginally.
Domestic macroeconomic risks increased on concerns related to domestic growth, inflation and capital flows.
Going forward, respondents’ perceptions of key risks to financial stability included: geopolitical risks; concerns
over domestic growth; cyber security; and climate risk.

The 27th round of the Reserve Bank’s Systemic Risk Survey (SRS) was conducted in November 2024 to solicit
perceptions of experts, including economists and market participants, on major risks faced by the Indian
financial system. In addition to key global and macroeconomic factors, the current round of the survey also
gauged sentiments on (i) impact of rising global economic uncertainty on India’s macro-financial stability
and (ii) revival of private capex cycle.
A summary of feedback received from 51 respondents is presented below.
• The panellists categorised all the major risk groups in medium risk category. Risk perception of
macroeconomic risks increased marginally, led by growth and inflation concerns, volatility in capital
flows and consumption demand outlook.
• Other major risk categories saw a decrease in/similar risk perception as compared to previous survey
round (Figure 1).
Figure 1: Systemic Risk Survey: Major Risk Groups

Major Risk Groups May-24 Nov-24 Change in Risk Perception1

A. Global risks 5.6 5.6 Unchanged
B. Macroeconomic risks 5.2 5.4 Increased
C. Financial market risks 5.8 5.7 Decreased
D. Institutional risks 5.4 5.4 Unchanged
Source: Systemic Risk Survey (May 2024 and November 2024).

Risk Category
8.1 - 10 6.1 - 8 4.1 - 6 2.1 - 4 0-2
Very high High Medium Low Very low

• Among global risks, geopolitical conflicts/geo-economic fragmentation is perceived as high risk

to domestic financial system. The risk score of commodity price risk and monetary tightening in
advanced economies has decreased significantly.
• Among macroeconomic factors, risk perception due to domestic growth, inflation and capital flows
has increased substantially as compared to the last survey round. Panellists ranked climate risk in
high risk category even though overall its risk score declined marginally.
1
The risk perception, as it emanates from the systemic risk survey conducted at different time periods (on a half-yearly basis in May and
November), may shift from one risk category to the other, reflected by the change in colour. However, within the same risk category (boxes
with the same colour), the risk perception may also increase/decrease or remain the same, the shift being indicated accordingly through average
numeric values.

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• Financial market risks saw a decrease in risk perception in individual risk categories barring foreign
exchange rate risks. Equity price volatility remained in high risk category.
• Among institutional risks, outlook on asset quality and profitability has deteriorated as compared to
last survey round. Cyber risk continued to remain in high risk category (Figure 2).

Figure 2: Systemic Risk Survey: Risks Identified

Change in Risk
Category Sub-category May-24 Nov-24
Perception
Global growth 5.9 5.9 Unchanged
A. Global Risks

Funding risk (External borrowings) 5.3 5.2 Decline

Commodity price risk (including crude oil prices) 6.4 5.7 Decline

Monetary tightening in advanced economies 5.4 4.5 Decline

Geo-political conflict/Geo-economic fragmentation (new addition) NA 6.8

Domestic growth 4.5 5.7 Increase

Domestic inflation 5.2 5.7 Increase

Current account deficit 4.5 4.4 Decline

B. Macroeconomic Risks

Capital inflows/ outflows (Reversal of FIIs, Slowdown in FDI) 5.3 6.1 Increase

Fiscal deficit 4.7 4.6 Decline

Corporate sector risk 4.6 4.5 Decline

Real estate prices 5.1 4.9 Decline

Consumption demand 5.6 5.9 Increase

Investment growth 5.3 5.5 Increase

Household savings 5.8 5.6 Decline

Climate risk 6.9 6.7 Decline

Foreign exchange rate risk 5.3 5.9 Increase
Market Risks
C. Financial

Equity price volatility 6.5 6.5 Unchanged

Interest rate risk 5.8 5.4 Decline

Liquidity risk 5.5 5.0 Decline

Asset quality deterioration 4.8 5.1 Increase
D. Institutional

Banks’ exposure to interest rate risk 5.3 5.1 Decline

Risks

Cyber risk 6.8 6.4 Decline

Operational risk 5.6 5.3 Decline

Profitability 4.7 5.2 Increase

NA : Not Applicable as the risk was included in November round for the first time.
Risk Category

8.1 - 10 6.1 - 8 4.1 - 6 2.1 - 4 0-2

Very high High Medium Low Very low

• About three fourths of the respondents expressed higher or similar level of confidence in the stability
of the global financial system.

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Chart 1: Confidence in the Stability of the Financial System

• One fifth respondents showed higher level of confidence and three fifths showed similar level
of confidence in the financial stability. Notably, a higher number of respondents have expressed
decreased level of confidence in the stability of the global and domestic financial system from the
previous survey rounds (Chart 1 a and b).

• 60 per cent of the respondents assessed better or similar prospects for the Indian banking
sector over one year horizon, as compared to 88 per cent respondents in the previous survey round
(Chart 2).

• Panellists were divided on the asset quality outlook of the banking sector. About 60 per cent of the
respondents expected asset quality to remain stable/improve owing to strong domestic growth and
likely reduction in interest rates. However, pockets of stress such as microfinance and personal
loans remain key downside risks to asset quality with almost 39 per cent of the panellists seeing a
marginal deterioration in the next six months (Chart 3 a).

Chart 2: Prospects of Indian Banking Sector in the Next One Year

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Chart 3: Indian Banking Sector – Outlook

• On credit growth, 40 per cent of the respondents expected credit demand to deteriorate marginally
in the near term attributable to subdued urban demand, regulatory focus on unsecured loan growth
and stricter underwriting amid rising delinquency levels in select loan segments. Nearly one fourth
of the respondents assessed credit demand to remain unchanged (Chart 3 b).
• Respondents were asked for their views on the probable spillover impact of instability in global
financial system on India’s macro-economic and financial stability. Nearly 95 per cent of the
respondents perceived medium/limited impact of such global events on Indian financial stability in
the near term (Chart 4).
• About three fifths of the respondents expected high/medium impact of global economic uncertainty
on domestic macroeconomic stability (Chart 5).
• Around half of the panellists perceived that revival of private capex cycle is unlikely to materialise
in the coming one year (Chart 6).

Chart 4: Spillover Impact of Instability in Global Chart 5: Impact of Rising Global Economic Uncertainty
Financial System on Domestic Macroeconomic Stability
(Share of respondents, in per cent) (Share of respondents, per cent)

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Chart 6: Possibility of Revival of Private Capex Cycle in India Figure 3: Word Cloud of Key Risks
(Share of respondents, in per cent) (Next 6-12 Months)

Risks to Financial Stability

Going forward, respondents identified the following risks to domestic financial stability (Figure 3):
• Geopolitical conflicts
• Global growth and inflation concerns
• Capital outflows and impact on Indian Rupee
• Increase in trade tariffs and impact on global trade
• Slowdown in domestic growth and consumption demand
• Climate risks
• Cybersecurity concerns

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Annex 2
Methodologies
2.1 Scheduled Commercial Banks
(a) Banking stability map and indicator
The banking stability map and indicator present an overall assessment of changes in underlying
conditions and risk factors that have a bearing on the stability of the banking sector during a period.
The six composite indices represent risk in six dimensions - soundness, asset quality, profitability,
liquidity, efficiency and sensitivity to market risk. Each composite index is a relative measure of risk
during the sample period used for its construction, where a higher value would mean higher risk in
that dimension.
The financial ratios used for constructing each composite index are given in Table 1. Each financial
ratio is first normalised for the sample period using the following formula:

where Xt is the value of the ratio at time t. If a variable is negatively related to risk, then normalisation
is done using 1-Yt . Composite index of each dimension is then calculated as a simple average of the
normalised ratios in that dimension. Finally, the banking stability indicator is constructed as a simple
average of these six composite indices. Thus, each composite index and the overall banking stability
indicator takes values between zero and one.
Table 1: Ratios used for constructing the Banking Stability Map and Indicator
Dimension Ratios*

Soundness CRAR # Net NPAs to Capital Tier 1 Capital to Assets #

Gross NPAs to Total Provisioning Coverage SMA-1 and SMA-2 Loans to Restructured Standard
Asset Quality Advances Ratio # Total Advances Advances to Standard
Advances

Return on Assets # Net Interest Margin # Growth in Earnings Before Interest Margin to Gross
Profitability
Provisions and Taxes # Income #

Liquid Assets to Total Liquidity Coverage Non-Bank Advances to

Liquidity
Assets # Ratio # Customer-Deposits

Cost to Income Business (Credit + Deposits) Staff Expenses to Operating

Efficiency
to Staff Expenses # Expenses

Sensitivity to RWA (market risk) to PV01 of HFT and AFS Total Net Open Position in
market risk Capital Investments-to-Total Capital Forex-to-Total Capital
Note: * Some of the ratios comprising various dimensions have been replaced from this issue.
# Negatively related to risk.

(b) Single factor sensitivity analysis ─ Stress testing

As part of quarterly surveillance, stress tests are conducted covering credit risk, interest rate risk, liquidity
risk etc. and the resilience of commercial banks in response to these shocks is studied. The analysis is done
on individual SCBs as well as on the system level.

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I. Credit risk (includes concentration risk)

To ascertain the resilience of banks, the credit portfolio was given a shock by increasing GNPA
ratio for the entire portfolio. For testing the credit concentration risk, default of the top individual
borrower(s) and the largest group borrower(s) was assumed. The assumed increase in GNPAs was
distributed across sub-standard, doubtful and loss categories in the same proportion as prevailing in
the existing stock of NPAs. However, for credit concentration risk (exposure based), the additional
GNPAs under the assumed shocks were considered to fall into sub-standard category only and for
credit concentration risk (based on stressed advances), stressed advances were considered to fall
into loss category. The provisioning requirements were taken as 25 per cent, 75 per cent and 100
per cent for sub-standard, doubtful and loss advances respectively. These norms were applied on
additional GNPAs calculated under a stress scenario. As a result of the assumed increase in GNPAs,
loss of income on the additional GNPAs for one quarter was also included in total losses, in addition
to the incremental provisioning requirements. The estimated provisioning requirements so derived
were deducted from banks’ capital and stressed capital adequacy ratios were computed.
II. Sectoral credit risk
To ascertain the sectoral credit risk of individual banks, the credit portfolios of a particular sector
was given a shock by increasing GNPA ratio for the sector. Sector specific shocks based on standard
deviation (SD) of GNPA ratios of a sector are used to study the impact on individual banks. The
additional GNPAs under the assumed shocks were considered to fall into sub-standard category
only. As a result of the assumed increase in GNPAs, loss of income on the additional GNPAs for one
quarter was also included in total losses, in addition to the incremental provisioning requirements.
The estimated provisioning requirements so derived were deducted from banks’ capital and stressed
capital adequacy ratios were computed.
III. Interest rate risk
Under assumed shocks of shift in the INR yield curve, there could be losses on account of the fall in
value of the portfolio or decline in income.
For interest rate risk in the investment portfolio: AFS, FVTPL (including HFT book) and HTM
categories, a duration analysis approach was considered for computing the valuation impact
(portfolio losses). The portfolio losses on these investments were calculated for each time bucket of
AFS, FVTPL (including HFT book) and HTM categories based on the applied shocks. These estimated
losses were reduced from banks’ capital and market risk weighted losses from RWA to arrive at
stressed capital ratios.
Interest rate risk of banks refers to the risk to a bank’s capital and earnings arising from adverse
movements in interest rates that affect bank’s books. The impact on earnings is measured using the
traditional gap analysis (TGA) and the capital impact is measured by duration gap analysis (DGA).
The focus of TGA is to measure the level of a bank’s exposure to interest rate risk in terms of the
sensitivity of its net interest income (NII) to interest rate movements over one-year horizon. It
involves bucketing of all rate-sensitive assets (RSA), rate-sensitive liabilities (RSL), and off-balance
sheet items as per residual maturity/ re-pricing date, in various time bands and computing earnings-

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at-risk (EAR) i.e., loss of income under different interest rate scenarios over a time horizon of one
year. Advances, investments, swaps/ forex swaps and reverse repos are the major contributors to RSA
whereas deposits, swaps /forex swaps and repos are the main elements under RSL. The DGA involves
bucketing of all RSA and RSL as per residual maturity/ re-pricing dates in various time bands and
computing the modified duration gap (MDG) to estimate the impact on the market value of equity.
MDG is calculated with the following formula: MDG = [MDA - MDL * (RSL / RSA)], where MDA and
MDL are the weighted averages of the modified duration (MD) of items of RSA and RSL, respectively.
Thereafter, change in market value of equity (MVE) is computed as ΔE/ E = ‐[MDG]*RSA* Δi/ E,
where Δi is the change in interest rate and E is equity (i.e. net worth).
IV. Equity price risk
Under the equity price risk, the impact of the shock of a fall in the equity price index, by certain
percentage points, on bank capital was examined. The loss due to the fall in the value of the portfolio
on account of change in equity prices is deducted from the bank’s capital to arrive at the stressed
capital.

(c) Bottom-up stress testing: Derivatives portfolios of select banks

Stress tests on derivatives portfolio (in terms of notional value) were carried out by a sample of 25 banks,
constituting the major active authorised dealers and interest rate swap counterparties. Each bank in the
sample was asked to assess the impact of stress conditions on their respective derivatives portfolio.
In case of domestic banks, the derivatives portfolio of both domestic and overseas operations was included.
In case of foreign banks, only the domestic (Indian) position was considered for the exercise. Derivatives
trades where hedge effectiveness was established were exempted from the stress tests, while all other
trades were included.
The stress scenarios incorporated four shocks consisting of the spot USD-INR rate and domestic interest
rates as parameters (Table 2).
Table 2: Shocks for sensitivity analysis
Domestic interest rates

Overnight +2.5 percentage points

Shock 1 Up to 1-year +1.5 percentage points

Above 1-year +1.0 percentage points

Domestic interest rates

Overnight -2.5 percentage points

Shock 2 Up to 1-year -1.5 percentage points

Above 1-year -1.0 percentage points

Exchange rates

Shock 3 USD-INR +20 per cent

Exchange rates

Shock 4 USD-INR -20 per cent

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2.2 Primary (Urban) Co-operative Banks

Single factor sensitivity analysis ─ Stress testing
Stress testing of UCBs was conducted with reference to the reported position as of September 2024. The
banks were subjected to baseline, medium and severe stress scenarios in the areas of credit risk, market
risk and liquidity risk as follows:
I. Credit Default Risk
• Under credit default risk, the model aims to assess the impact of stressed credit portfolio of a
bank on its CRAR.
• The arithmetic mean of annual growth rate of GNPAs was calculated separately for each NPA
class (sub-standard, doubtful 1 (D1), doubtful 2 (D2), doubtful 3 (D3) and loss assets) based on
reported data between 2009 and 2024 for the UCB sector as a whole. This arithmetic mean of
annual growth rate formed the baseline scenario, which was further stressed by applying shocks
of 1.5 standard deviation (SD) and 2.5 SD to generate medium and severe stress scenarios for
each category separately. These were further adjusted based on NPA divergence level.
• Based on the above methodology, the annual NPA growth rate matrix arrived at under the three
scenarios are as below.
(per cent)

Increase in Increase in Increase in Increase in Increase in

Substandard Assets D1 assets D2 assets D3 assets Loss assets

Baseline 21.71 17.10 15.93 14.38 29.83

Medium Stress 62.37 46.09 39.56 49.27 169.57

Severe Stress 89.47 65.42 55.32 72.53 262.72

II. Credit Concentration Risk

• The impact on CRAR, under assumed scenarios of top 1, 2, 3 single borrower exposures moving
to ‘loss advances’ category requiring 100 per cent provisioning, was assessed. These exposures
may not necessarily be ‘standard advances’ but are identified based on their potential to require
higher provisioning, thereby reflecting more impactful stress scenario.
III. Interest Rate Risk in Trading Book
• Duration analysis approach was adopted for analysing the impact of upward movement of
interest rates on the AFS and HFT portfolio of UCBs.
• Upward movement of interest rates by 50 bps, 100 bps and 150 bps were assumed under the
three stress scenarios and consequent provisioning impact on CRAR was assessed.
IV. Interest Rate Risk in Banking Book
• The banking book of UCBs was subjected to interest rate shocks of 50 bps, 100 bps and 150 bps
under three stress scenarios and its impact on net interest income was assessed.

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V. Liquidity risk
• The stress test was conducted based on cumulative cash flows in the 1-28 days’ time bucket.
The cash inflows and outflows were stressed under baseline, medium, and severe scenarios.
• While the inflows are stressed uniformly at 5 per cent under all the stress scenarios, outflows
are stressed based on worst negative deposit growth recorded across quarters for the periods
ranging across past ten years (2014 - 2024). Since UCBs are primarily dependent on deposits as
major source of funds, negative growth in deposits is considered as representative of stressed
outflows. Further, three months period is considered as representative of 1-28 days’ bucket as
this is the closest short-term period for which deposits data is available for all the banks (given
that all the banks submit quarterly returns). The average of worst negative deposit growth rate
for ten years is considered as baseline scenario, which is further stressed by 1.5 SD and 2.5 SD
to generate medium and severe stress scenarios for outflows.
• The banks with negative cumulative mismatch (cash inflow less cash outflow) exceeding 20 per
cent of the outflows were considered to be under stress on the basis of the circular RBI/2008-
09/174 UBD. PCB. Cir. No12/12.05.001/2008-09 dated September 17, 2008, which stipulates that
the mismatches (negative gap between cash inflows and outflows) during 1-14 days and 15-28
days’ time bands in the normal course should not exceed 20 per cent of the cash outflows in
each time band.

2.3 Non-Banking Financial Companies (NBFCs)

Single factor sensitivity analysis- Stress Testing
Credit and liquidity risk stress tests for NBFCs have been performed under baseline, medium and high risk
scenarios.
I. Credit risk
Major items of the balance sheet of NBFCs over one year horizon were projected by applying moving
average and smoothing techniques. Assets, advances to total assets ratio, earnings before profit and
tax (EBPT) to total assets ratio, risk-weight density and slippage ratio were projected over the next
one year; and thereafter, based on these projections – new slippages, provisions, EBPT, risk-weighted
assets and capital were calculated for the baseline scenario. For the medium and high-risk scenarios,
GNPA ratios under baseline scenario were increased by 1 SD and 2 SD and accordingly new capital
and CRAR were calculated.
II. Liquidity Risk
Stressed cash flows and mismatch in liquidity position were calculated by assigning predefined stress
percentage to the overall cash inflows and outflows in different time buckets over the next one year.
Projected outflows and inflows as on September 2024 over the next one year were considered for
calculating the liquidity mismatch under the baseline scenario. Outflows and inflows of the sample
NBFCs were applied a shock of 5 per cent and 10 per cent for time buckets over the next one year
for the medium and high-risk scenarios, respectively. Cumulative liquidity mismatch due to such
shocks was calculated as per cent of cumulative outflows and, NBFCs with negative cumulative
mismatch were identified.

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2.4 Stress Testing Methodology of Mutual Funds

The SEBI has mandated all open-ended debt schemes (except overnight schemes) to conduct stress testing.
Accordingly, Association of Mutual Funds in India (AMFI) prescribed the “Best Practice Guidelines on
Stress Testing by Debt Schemes of Mutual Funds”. The stress testing is carried out internally by all Asset
Management Companies (AMCs) on a monthly basis and when the market conditions require so. A uniform
methodology is being followed across the industry for stress testing with a common outcome, i.e., impact
on NAV as a result of the stress testing.

Stress testing parameters

The stress testing is conducted on the three risk parameters, viz., interest rate risk, credit risk and liquidity
risk.

A. Interest Rate Risk Parameter

For interest rate risk parameter, AMCs subject the schemes at portfolio level to the following scenarios
of interest rate movements and assess the impact on NAV.

a) The highest increase in G-Sec yield in the last 120 months (1-year G-Secs or 10-year G-Secs
whichever is higher on month-on-month basis comparing maximum yield of a month to
minimum yield of previous month).

b) Two-third of the highest increase in G-Sec yield in the last 120 months.

c) One-third of the highest increase in G-Sec yield in the last 120 months

B. Credit Risk Parameter

For credit risk parameter, AMCs may subject the securities held by the scheme to the following:

1. Calculate the probability of downgrade of each security. In this regard, to incorporate all possible
downgrade scenarios (notches) for each security, probability tables published by rating agencies
are being used.

2. Further, each potential notched down rating will correspond to a change in valuation yield
for the security corresponding to that change in rating. The change in valuation yields for the
respective rating changes is derived from the valuation matrix used by the valuation agencies.

3. The sum product of probability of downgrade within investment grade and change in yield
on that downgrade of a security, is then multiplied by the duration of that security and the
weightage of that security in the portfolio. Separately, the sum product of probability of
downgrade below investment grade with haircut applicable on that downgrade of any security,
is multiplied with the weightage of that security in the portfolio. These two sum products are
added to get the aggregate potential impact at a security level.

4. The summation of all these security level outputs is considered as the portfolio level credit
impact.

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C. Liquidity Risk Parameter

For liquidity risk parameter, the following analysis is being undertaken:
1. Data for past periods of stress (viz. stress scenarios during the years 2008, 2013, 2018, 2020)
along with rise in yields for a given credit rating, type of security, etc. in respective matrices for
the relevant duration bucket is considered.
2. The change in median yield differential over G-Sec during stress period compared to the
preceding normal period (normal period is a period starting 6 months prior to the start of the
stress period and ending at the start of the stress period) is considered as rise in spread for the
purpose of stress testing.
3. AMCs take yield spike as higher than the AMFI-specified values for stress testing based on
market scenarios.
4. These calculations are again reiterated for individual securities based on respective ratings,
matrix-based sector as provided in the matrix files and duration bucket and aggregated at the
portfolio level to get the portfolio level output.
AMCs additionally consider extreme stress scenarios of time bound liquidation (viz 5 days, 3 days and 1
day) of full portfolios and its impact on NAV by applying suitable haircuts.

2.5 Methodology for Stress Testing Analysis at Clearing Corporations

SEBI has specified the granular norms related to core settlement guarantee fund (SGF); stress testing
and default procedures to create a core fund (called core SGF) within the SGF against which no exposure
is given and which is readily and unconditionally available to meet settlement obligations of clearing
corporation in case of clearing member(s) failing to honour settlement obligation; align stress testing
practices of clearing corporations with Principles for Financial Market Infrastructures (norms for stress
testing for credit risk, stress testing for liquidity risk and reverse stress testing including frequency and
scenarios); capture the risk due to possible default in institutional trades in stress testing; harmonise
default waterfalls across clearing corporations; limit the liability of non-defaulting members in view of the
Basel capital adequacy requirements for exposure towards central counterparties (CCPs); ring-fence each
segment of clearing corporation from defaults in other segments; and bring in uniformity in the stress
testing and the risk management practices of different clearing corporations especially with regard to the
default of members.
Stress testing is carried out at clearing corporations (CCs) to determine the minimum required corpus
(MRC), which needs to be contributed by clearing members (CMs) to the core SGF. The MRC is determined
separately for each segment (viz. cash market, equity derivatives, currency derivatives, commodity
derivatives, debt and tri-party repo segment) every month based on stress testing subject to the following:
i. The MRC is fixed for a month.
ii. By 15th of every month, CCs review and determine the MRC for next month based on the results of
daily stress tests of the preceding month.

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iii. For every day of the preceding month, uncovered loss numbers for each segment are estimated
based on stress test and highest of such numbers is taken as worst-case loss number for the day.
iv. Average of all the daily worst case loss numbers determined in (iii) above is calculated.
v. The MRC for next month is at least the higher of the average arrived in at step (iv) above and the
segment MRC as per previous review.
For determining the MRC for cash, equity derivatives and currency derivatives segment, CCs calculate the
credit exposure arising out of a presumed simultaneous default of top two CMs. The credit exposure for
each CM is determined by assessing the close-out loss arising out of closing open positions (under stress
testing scenarios) and the net pay-in/ pay-out requirement of the CM against the required margins and
other mandatory deposits of the CM. The MRC or average stress test loss of the month is determined as
the average of all daily worst case loss scenarios of the month. The actual MRC for any given month is
determined as at least the higher of the average stress test loss of the month or the MRC arrived at any time
in the past. For the debt segment, the trading volume is minimal, and hence the MRC for the core SGF is
calculated as higher of ₹4 crore or aggregate losses of top two CMs, assuming close out of obligations at a
loss of four per cent less required margins. The tri-party repo segment and commodity derivatives segment
also follow the same stress testing guiding principles as prescribed for equity cash, equity derivatives
and currency derivatives segments. For commodity derivatives segment, however, MRC is computed as
the maximum of either credit exposure on account of the default of top two CMs or 50 per cent of credit
exposure due to simultaneous default of all CMs. Further, the minimum threshold value of MRC for
commodity derivatives segment of any stock exchange is ₹10 crore.
CCs carry out daily stress testing for credit risk using at least the standardized stress testing methodology
prescribed by SEBI for each segment. Apart from the stress scenarios prescribed for cash market and
derivatives market segments, CCs also develop their own scenarios for a variety of ‘extreme but plausible
market conditions’ (in terms of both defaulters’ positions and possible price changes in liquidation periods,
including the risk that liquidating such positions could have an impact on the market) and carry out stress
testing using self-developed scenarios. Such scenarios include relevant peak historic price volatilities, shifts
in other market factors such as price determinants and yield curves, multiple defaults over various time
horizons and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market
conditions. Also, for products for which specific stress testing methodology has not been prescribed, CCs
develop extreme but plausible market scenarios (both hypothetical and historical) and carry out stress
tests based on such scenarios and enhance the corpus of SGF, as required by the results of such stress tests.
2.6 Interconnectedness ─ Network analysis
Matrix algebra is at the core of the network analysis, which uses the bilateral exposures between entities
in the financial sector. Each institution’s lendings to and borrowings from all other institutions in the
system are plotted in a square matrix and are then mapped in a network graph. The network model uses
various statistical measures to gauge the level of interconnectedness in the system. Some of the important
measures are given below:

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I. Connectivity Ratio: This statistic measures the extent of links between the nodes relative to all
possible links in a complete graph. For a directed graph, denoting total number of out-degrees as
and the total number of nodes as N, connectivity ratio is given as .

II. Cluster coefficient: Clustering in networks measures how interconnected each node is. Specifically,
there should be an increased probability that two of a node’s neighbours (banks’ counterparties in
case of a financial network) are neighbours to each other also. A high clustering coefficient for the
network corresponds with high local interconnectedness prevailing in the system. For each bank
with ki neighbours the total number of all possible directed links between them is given by ki (ki-1).
Let Ei denote the actual number of links between bank i’s ki neighbours. The clustering coefficient
Ci for bank i is given by the identity:

The clustering coefficient (C) of the network as a whole is the average of all Ci’s:

III. Tiered network structures: Typically, financial networks tend to exhibit a tiered structure. A tiered
structure is one where different institutions have different degrees or levels of connectivity with
others in the network. In the present analysis, the most connected banks are in the innermost
core. Banks are then placed in the mid-core, outer core and the periphery (the respective concentric
circles around the centre in the diagram), based on their level of relative connectivity. The range of
connectivity of the banks is defined as a ratio of each bank’s in-degree and out-degree divided by that
of the most connected bank. Banks that are ranked in the top 10 percentile of this ratio constitute
the inner core. This is followed by a mid-core of banks ranked between 90 and 70 percentile and a
3rd tier of banks ranked between the 40 and 70 percentile. Banks with a connectivity ratio of less
than 40 per cent are categorised in the periphery.

IV. Colour code of the network chart: The blue balls and the red balls represent net lender and net
borrower banks respectively in the network chart. The colour coding of the links in the tiered
network diagram represents the borrowing from different tiers in the network (for example, the
green links represent borrowings from the banks in the inner core).

(a) Solvency contagion analysis

The contagion analysis is in the nature of a stress test where the gross loss to the banking system owing
to a domino effect of one or more banks failing is ascertained. We follow the round by round or sequential
algorithm for simulating contagion that is now well known from Furfine (2003). Starting with a trigger
bank i that fails at time 0, we denote the set of banks that go into distress at each round or iteration by Dq,
q= 1,2, …For this analysis, a bank is considered to be in distress when its Tier I capital ratio goes below 7
per cent. The net receivables have been considered as loss for the receiving bank.

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(b) Liquidity contagion analysis

While the solvency contagion analysis assesses potential loss to the system owing to failure of a net
borrower, liquidity contagion estimates potential loss to the system due to the failure of a net lender. The
analysis is conducted on gross exposures between banks comprising both fund based ones and derivatives.
The basic assumption for the analysis is that a bank will initially dip into its liquidity reserves or buffers to
tide over a liquidity stress caused by the failure of a large net lender. The items considered under liquidity
reserves are: (a) excess CRR balance; (b) excess SLR balance; and (c) 18 per cent of NDTL. If a bank is able
to meet the stress with liquidity buffers alone, then there is no further contagion.
However, if the liquidity buffers alone are not sufficient, then a bank will call in all loans that are ‘callable’,
resulting in a contagion. For the analysis only short-term assets like money lent in the call market and
other very short-term loans are taken as callable. Following this, a bank may survive or may be liquidated.
In this case there might be instances where a bank may survive by calling in loans, but in turn might
propagate a further contagion causing other banks to come under duress. The second assumption used
is that when a bank is liquidated, the funds lent by the bank are called in on a gross basis (referred to as
primary liquidation), whereas when a bank calls in a short-term loan without being liquidated, the loan
is called in on a net basis (on the assumption that the counterparty is likely to first reduce its short-term
lending against the same counterparty. This is referred to as secondary liquidation).
(c) Joint solvency-liquidity contagion analysis
A bank typically has both positive net lending positions against some banks while against some other
banks it might have a negative net lending position. In the event of failure of such a bank, both solvency
and liquidity contagion will happen concurrently. This mechanism is explained by the following flowchart:
Flowchart of Joint Liquidity-Solvency contagion due to a bank coming under distress
Trigger Bank

Solvency Contagion: Primary liquidation:

Erosion of capital of All interbank loans are
net lenders to the called back by the trigger
trigger bank bank on a gross basis

Are
Are net liquidity
No lender's Yes Yes buffers of
capital Contagion the banks
buffers over from loans
sufficient? called in
sufficient?

No
Contagion from
Interbank loans whom interbank
given by the banks loans are called in
are called in starts

Are
liquidity
Yes buffers and
interbank
loans called in
sufficient?
No

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The trigger bank is assumed to have failed for some endogenous reason, i.e., it becomes insolvent and
thus impacts all its creditor banks. At the same time it starts to liquidate its assets to meet as much of
its obligations as possible. This process of liquidation generates a liquidity contagion as the trigger bank
starts to call back its loans.
Since equity and long-term loans may not crystallise in the form of liquidity outflows for the counterparties
of failed entities, they are not considered as callable in case of primary liquidation. Also, as the RBI
guideline dated March 30, 2021 permits the bilateral netting of the MTM values in case of derivatives at
counterparty level, exposures pertaining to derivative markets are considered to be callable on net basis
in case of primary liquidation.
The lender/creditor banks that are well capitalised will survive the shock and will generate no further
contagion. On the other hand, those lender banks whose capital falls below the threshold will trigger a
fresh contagion. Similarly, the borrowers whose liquidity buffers are sufficient will be able to tide over
the stress without causing further contagion. But some banks may be able to address the liquidity stress
only by calling in short term assets. This process of calling in short term assets will again propagate a
contagion.
The contagion from both the solvency and liquidity side will stop/stabilise when the loss/shocks are fully
absorbed by the system with no further failures.

2.7 Financial System Stress Indicator (FSSI)

FSSI is compiled using risk factors spread across five financial market segments (equity,
forex, money, government debt and corporate debt), three financial intermediary segments (banks,
NBFCs and AMC-MFs) as well as real sector (Table 3). FSSI lies between zero and unity, with higher
value indicating more stress. For its construction, the risk factors pertaining to each component
segment are first normalised using min-max method and thereafter aggregated based on simple
average into a sub-indicator ‘yi‘ representing the ith market/ sector. Finally, the composite FSSI is
obtained as,

where the weight ‘wi‘ of each sub-indicator ‘yi‘ is determined from its sample standard deviation
‘si‘, as,

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Table 3: Risk factors constituting each component of FSSI

1. Difference between NIFTY 50 monthly returns and its maximum over a two-year rolling window
Equity Market 2. NIFTY 50 Market capitalisation-to-GDP ratio
3. NSE-VIX Index
4. Net Equity FPI flows

5. Realised volatility in 10-year G-sec yield

Government
6. Term Spread: Spread between 10-year G-sec yield and 3-month T-Bill rate
Debt Market
7. Increase in the 10-year G-sec yield compared to the minimum over a two-year rolling window
8. Net Debt FPI flows

9. Difference between rupee dollar exchange rate and its maximum over a two-year rolling window.
Forex Market 10. m-o-m appreciation/depreciation of rupee dollar exchange rate
11. GARCH (1,1) volatility of rupee dollar exchange rate
12. Difference between 3-month forward premia and its historical maximum.

13. Spread between weighted average call rate and weighted average market repo rate
Money/Short Term 14. Spread between 3-month CD rate and 3-month T-Bill rate
Market 15. Spread between 3-month non-NBFC CP rate and 3-month T-Bill rate
16. Realised volatility of 3-month CP rate
17. Spread between 3-month OIS rate and 3-month T-Bill rate

18. Yield spread between 3-year AAA corporate bonds and 3-year G-sec
Corporate Bond Market
19. Difference between 3-year BBB and 3-year AAA corporate bond yield
20. Difference between 3-year BBB corporate bond yield and its maximum

21. CRAR (SCBs)

22. RoA (SCBs)
23. LCR (SCBs)
SCBs 24. Cost-to-Income (SCBs)
Banking Sector 25. Stressed Assets Ratio (SCBs)
26. Banking Beta: Cov(r,m)/Var(m), over 2-year moving window.
r = Bank NIFTY y-o-y, m = NIFTY 50 y-o-y

27. GNPA ratio (UCBs)

UCBs 28. CRAR (UCBs)
29. RoA (UCBs)

30. GNPA ratio

31. CRAR
NBFC Sector
32. RoA
33. Spread between 3-month NBFC CP rate and 3-month T-Bill rate

34. Mutual fund redemptions: y-o-y

AMC-MF Sector
35. Mutual fund net inflows

36. GDP growth

37. CPI inflation
Real Sector
38. Current account balance as a share of GDP
39. Gross fiscal deficit as a share of GDP

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Annex 3
Important Domestic Regulatory Measures
1. Reserve Bank of India (RBI)

Date Regulation Rationale

July 10, 2024 Basel III Capital Regulations - Eligible Credit To ensure that regulatory
Rating Agencies: On review, the Reserve Bank capital computation by banks is
has permitted banks to use the ratings of the undertaken in a prudent manner.
Brickwork Ratings India Private Limited (CRA) for
risk weighting their claims for capital adequacy
purposes, subject to limiting the threshold of
exposures that can be rated by the CRA.
July 24, 2024 Master Direction - Overseas Investment: Overseas For effective implementation
Investments by persons resident in India are of the provisions of the
governed by the provisions of Foreign Exchange Overseas Investment Rules and
Management (Overseas Investment) Rules, 2022 Regulations.
(OI Rules) notified by the Central Government.
These directions lay down the modalities as to how
the foreign exchange business has to be conducted
by the authorised persons with their customers/
constituents with a view to implement the OI Rules
and the OI Regulations. It covers the regulatory
requirements for both overseas direct and portfolio
investments and stipulates the permissible
investment limits and approvals required therein.
It also covers the reporting requirements and
restrictions for resident investors making overseas
investments.
July 29, 2024 ‘Fully Accessible Route’ for Investment by Non- To refine FAR, based on observed
residents in Government Securities – Exclusion investor preference.
of new issuances in 14-year and 30-year tenor
securities: On a review and in consultation with
the Government, it was decided to exclude all new
Central Government Securities of 14-year and 30-
year tenors from the Fully Accessible Route (FAR).

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Date Regulation Rationale

August 08, 2024 Frequency of Reporting of Credit Information For enabling lenders to make
by Credit Institutions (CI) to Credit Information informed credit decisions based
Companies: In order to ensure that the credit on more current information.
information reports (CIRs) provided by the
companies reflect a more recent information, the
frequency of reporting of credit information by CIs
to the companies has been increased from monthly
to fortnightly basis or such shorter intervals as
mutually agreed upon between the CI and the credit
information company, with effect from January 01,
2025.
August 19, 2024 Framework for Self-Regulatory Organisations Development of better industry
(SROs) in Financial Markets: In the backdrop of standards for self-regulation.
evolution of financial markets with increasing
financial market participants, growing scale of
operations, increasing adoption of innovative
technologies and enhanced customer outreach, a
need was felt to develop better industry standards
for self-regulation. Accordingly, a framework for
recognition of SROs in financial markets regulated
by the Reserve Bank has been put in place.
August 22, 2024 Inclusion of Recurring Payments for FASTag, To enhance convenience in
National Common Mobility Card (NCMC), etc. making travel/mobility related
with Auto-Replenishment Facility under the payments while using NCMC/
E-Mandate Framework: It was decided to include FASTag.
auto-replenishment of balances in FASTag and
NCMC under the e-mandate framework. Since the
payments for auto-replenishment are recurring in
nature but without any fixed periodicity, they will
be exempted from the requirement of pre-debit
notification to the customer.

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Date Regulation Rationale

October 10, 2024 Implementation of Credit Information Reporting To alleviate the challenges faced
Mechanism Subsequent to Cancellation of Licence in maintaining acurate credit
or Certificate of Registration (CoR): Entities whose information for borrowers
licence or CoR has been cancelled by the Reserve associated with these CIs,
Bank of India, can no longer be deemed as Credit ensuring data continuity and
Institutions (CIs) under the Credit Information reliability of lenders.
Companies (Regulation) Act, 2005 (CICRA) and
their credit information cannot be accepted by the
Credit Information Companies. This affects the
borrowers of those CIs whose repayment history is
not updated even if they continue to repay/ clear
their dues. It has now been mandated that CIs
will continue to report credit information to credit
information company even after cancellation of
their licence or CoR.

October 11, 2024 Facilitating Accessibility to Digital Payment To increase accessibility of

Systems for Persons with Disabilities – Payment Systems for Persons
Guidelines: Payment System Participants were with Disabilities.
advised to review their payment systems / devices
and make necessary modifications so that these
systems / devices could be accessed by Persons with
Disabilities with ease.

October 18, 2024 The Reserve Bank of India (Access Criteria for Streamlining the process to
NDS-OM) Directions, 2024: On a review of the access NDS-OM platform for
access criteria for the NDS-OM platform, the entities eligible to invest in
Reserve Bank has extended direct access to NDS- Government securities.
OM to a broader set of regulated entities and the
process for seeking direct access to NDS-OM has
been streamlined.

October 28, 2024 Issue of Revised Directions for Central To strengthen corporate
Counterparties: Some of the major changes in the governance in central
revised Directions include increased representation counterparties.
of independent directors in Board meetings as well
as in important committees such as Nomination
and Remuneration Committee, Risk Management
Committee and Audit Committee.

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 Financial Stability Report December 2024

Date Regulation Rationale

November 07, ‘Fully Accessible Route’ for Investment by Non- For ease of access to non-resident
2024 residents in Government Securities – Inclusion investors to invest and trade in
of Sovereign Green Bonds: Sovereign Green Bonds sovereign green bonds.
of 10-year tenor issued by the Government in the
second half of the fiscal year 2024-25 have been
designated as ‘specified securities’ under the Fully
Accessible Route (FAR).

November 08, Reporting of Foreign Exchange Transactions To capture complete transaction

2024 to Trade Repository: Authorized Dealers are data of authorized dealers or
required to report all over-the-counter (OTC) their overseas entities in all
foreign exchange and foreign currency interest rate foreign exchange instruments.
derivative contracts executed directly or through
their overseas entities—including branches, IFSC
Banking Units, wholly owned subsidiaries, and
joint ventures—to the Trade Repository (TR) of the
Clearing Corporation of India Ltd. (CCIL). To ensure
completeness of transaction data for all foreign
exchange instruments in the TR, the reporting
requirement shall be expanded to include foreign
exchange spot transactions (including value cash
and value tomorrow) in a phased approach.

November 11, Operational Framework for Reclassification of To provide step-by-step

2024 Foreign Portfolio Investment to Foreign Direct operational guidelines to
Investment (FDI): Schedule II of the Foreign foreign portfolio investors for
Exchange Management (Non-debt Instruments) reclassifying their investments
Rules, 2019 stipulates that foreign portfolio to FDI after necessary approvals,
investments, including those made with a foreign as applicable and reporting
portfolio investor group, must remain below 10 requirements thereafter.
percent of the fully diluted total paid-up equity
capital. If this limit is breached, foreign portfolio
investors are required to either divest or reclassify
such holdings as FDI. The Reserve Bank provided
an operational framework for such reclassification
to the AD Category-I banks for facilitating the
reporting of such transactions.

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Date Regulation Rationale

December 6, Collateral-free Agriculture Loan –– Enhancement To enhance coverage of small and
2024 of Limit: In view of overall inflation and rise in marginal farmers in the formal
agricultural input costs, the Reserve bank has credit system.
raised the limit for collateral free agricultural
loans including loans for allied activities from the
existing level of ₹1.6 lakh to ₹2 lakh per borrower.
The banks have been advised to give effect to the
revised instructions expeditiously and in any case
not later than January 1, 2025.

2. Securities and Exchange Board of India (SEBI)

Date Regulation Rationale
May 27, 2024 Framework for Issuance of Subordinate Units by To provide a framework for
Privately Placed Infrastructure Investment Trusts issuance of subordinate units by
(InvITs): The proposed framework provides clarity a privately placed InvITs.
on the usage of subordinate units as an instrument
to bridge the valuation gap arising on acquisition of
an infrastructure asset by a privately placed InvIT
thereby providing flexibility in asset acquisition
transaction along with promoting ease of doing
business.
May 29, 2024 Norms for Acceptable Collaterals and Exposure To further strengthen the risk
of Clearing Corporations (CCs): The existing management framework of
collaterals accepted by CCs have been reviewed and Clearing Corporations and ensure
revised, and prudential norms for exposure of CCs their operational resilience.
have been introduced.
June 05, 2024 Enhancement of Operational Efficiency and Risk To protect client’s securities
Reduction – Pay-out of Securities directly to from being misused by the stock
Client Demat Account. brokers by mandating pay-out
of securities directly to client’s
demat account by Clearing
Corporations.
June 05, 2024 Disclosures of Material Changes and Other To facilitate ease of compliance
Obligations for Foreign Portfolio Investors and by foreign portfolio investors.
Framework for Providing Flexibility to Foreign
Portfolio Investors in Dealing with their Securities
Post Expiry of their Registration.

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 Financial Stability Report December 2024

Date Regulation Rationale

June 19, 2024 Contribution to Core Settlement Guarantee To enable direct participation in
Fund and Default Waterfall for Limited Purpose the LPCC for transacting in tri-
Clearing Corporation (LPCC). party repo for corporate bonds.
June 20, 2024 Modification in Duration for Call Auction in Pre- To curb misuse of the call auction
Open Session for Initial Public Offer (IPO) and in pre-open session for Initial
Relisted Scrips: The current provisions have been Public Offer (IPO) and relisted
modified and additional surveillance measures at scrips.
stock exchanges have been introduced.
June 20, 2024 System Audit Framework of Professional Clearing To ensure robustness of IT
Members (PCMs). systems of PCMs and compliance
with various guidelines issued
by the SEBI and Clearing
Corporations.
June 25, 2024 Statutory Committees at Market Infrastructure To enhance effective oversight
Institutions (MIIs): The composition and terms of of the functioning of Stock
reference (ToRs) of various Statutory Committees Exchanges, CCs and Depositories.
of MIIs have been modified.
June 27, 2024 Reduction of Trading Lot for Privately Placed To promote ease of doing
InvITs to ₹25 lakh as Part of Measures Towards business for InvITs and facilitate
Ease of Doing Business: The trading lot for increase in liquidity for units of
privately placed InvITs is reduced to ₹25 lakh to privately placed InvITs,
allow broader base of investors to participate in the
market which shall also promote diversification of
investment portfolios, thus enabling investors to
better manage risk.
June 27, 2024 Participation by Non-Resident Indians (NRIs), To channel more NRI/OCI/
Overseas Citizens of India (OCIs) and Resident RI investments into Indian
Indian (RI) Individuals in the SEBI Registered securities market by facilitating
Foreign Portfolio Investors based in the greater participation of NRIs/
International Financial Services Centres in India. OCIs/RIs in the corpus of the
foreign portfolio investors.
June 28, 2024 Facility for Basic Services Demat Account (BSDA) To achieve wider financial
for Financial Inclusion and Ease of Investing. inclusion by boosting
participation of investors in
securities market by enhancing
the limit for a demat account to
be categorized as BSDA.

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Date Regulation Rationale

July 04, 2024 Brokers’ Institutional Mechanism for Prevention To instil confidence in securities
and Detection of Fraud or Market Abuse: Stock market by prevention of fraud or
brokers shall put in place the following institutional market abuse.
mechanisms: (a) Systems for surveillance of trading
activities and internal controls; (b) Obligations of
the stock broker and its employees; (c) Escalation
and reporting mechanisms; and (d) Whistle Blower
Policy.
July 08, 2024 Streamlining of Prudential Norms for Passive To streamline the extant
Schemes regarding Exposure to Securities of prudential norms applicable
Group Companies of the Sponsor of Mutual to investments by passively
Funds: Equity oriented ETFs and Index Funds, managed mutual fund schemes
based on widely tracked and non-bespoke indices, in the group companies of their
with collective asset under management (AUM) of sponsors.
₹20,000 crore and above are now allowed to take
exposure up to the weightage of the constituents in
the underlying index. This exposure is subject to an
overall cap of 35 per cent of net asset value of the
schemes in the group companies of the sponsor.
July 13, 2024 Unit Based Employee Benefit for Real Estate To facilitate and provide flexibility
Investment Trusts (REITs) and InvITs. in employee compensation as
well as alignment of interests
with unitholders.
July 19, 2024 Enabling the SEBI-registered Credit Rating To permit the SEBI-registered
Agencies (CRAs) and ESG Rating Providers (ERPs) CRAs and ERPs to undertake
to undertake rating activities under the IFSCA rating activities in the IFSC-GIFT
city, in line with an activity-based
regulatory approach.
August 06, 2024 Board Nomination Rights to Unitholders of REITs To facilitate ease of doing
and InvITs: The amendment to the respective business for REITs and InvITs.
master circulars of REITs and InvITs provided clarity
on the availability of the right to a unitholder to
nominate a director on the Board of Directors of
the Manager/ Investment Manager of REIT/InvIT,
where such nomination right is also available to a
unitholder in terms of the SEBI Debenture Trustees
Regulations.

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 Financial Stability Report December 2024

Date Regulation Rationale

August 22, 2024 Review of Statement of Investor Complaints To facilitate ease of doing
and Timeline for Disclosure of Statement of business for REITs and InvITs.
Deviation(s): The amendment to the respective
master circulars of REITs and InvITs align the
provisions related to statement of investor
complaints and timelines for disclosure of
statement of deviation for InvITs and REITs with
the SEBI (Listing Obligations and Disclosure
Requirements) Regulations.
August 30, 2024 Review of Eligibility Criteria for Entry/Exit of To ensure that only high-quality
Stocks in Equity Derivatives Segment stocks with sufficient market
depth are allowed to trade in
equity derivatives segment.
September 12, Modifications in Guidelines for Business To ease compliance and to
2024 Continuity Plan (BCP) and Disaster Recovery (DR) protect the interests of investors
of Market Infrastructure Institutions (MIIs) by ensuring that data loss is
minimal after any technical
glitch.
September 20, Flexibility in Participation of Mutual Funds in To allow greater flexibility to
2024 Credit Default Swaps (CDS): Such flexibility to mutual funds to both buy and
participate in CDS shall serve as an additional sell CDS with adequate risk
investment product for mutual funds and also management measures.
aid in increasing liquidity in the corporate bond
market.
September 25, Amendment to the SEBI (Delisting of Equity To facilitate ease of doing
2024 Shares) Regulations, 2021: The amendments business, to protect the interests
are (a) introduction of fixed price process as an of investors and to provide
alternative to reverse book building process (RBB); flexibility in the voluntary
(b) introduction of an alternate delisting framework delisting framework.
for listed investment holding companies (IHC)
through scheme of arrangement by way of selective
capital reduction; (c) modification of counter-
offer mechanism in case of delisting through RBB
process; and (d) introduction of adjusted book
value as an additional parameter for determining
floor price for delisting, except for Public Sector
Undertakings.

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Date Regulation Rationale

September 26, Reduction in the Timeline for Listing of Debt To facilitate faster access to funds
2024 Securities and Non-Convertible Redeemable for issuers and for investors to
Preference Shares (NCRPS) to T+3 working days have early credit and liquidity of
from existing T+6 working days: With a view to their investments.
align the listing timeline in case of public issue
of debt securities and NCRPS with that of non-
convertible securities issued on private placement
basis and specified securities, listing timeline in
case of public issue of debt securities and NCRPS
is reduced to T+3 working days from the existing
timeline of T+6 working days.
3. Insurance Regulatory and Development Authority of India (IRDAI)
Date Regulation Rationale
May 17, 2024 Master Circular on Actuarial, Finance and To provide necessary guidance
Investment Functions of Insurers. to all insurers on aspects
pertaining to various provisions
of the IRDAI (Actuarial, Finance
and Investment Functions of
Insurers) Regulations,2024.
May 22, 2024 Master Circular on Corporate Governance for To provide various operational
Insurers. and procedural aspects, for
adoption of the IRDAI (Corporate
Governance for Insurers)
Regulations, 2024 by all insurers.
May 28, 2024 Circular on Unsolicited Commercial For wider dissemination
Communications (UCC) through Telecom amongst insurers and insurance
Resources. intermediaries about the recent
guidelines from the Telecom
Regulatory Authority of India
(TRAI) aimed at controlling UCC
through unauthorized telecom
resources.
May 29, 2024 Master Circular on Health Insurance Business. To specify requirements to
be complied with by Insurers
offering Health Insurance
Business subsequent to the
notification of the IRDAI
(Insurance Products) Regulations,
2024.

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 Financial Stability Report December 2024

Date Regulation Rationale

May 31, 2024 Master Circular on Reinsurance: The circular To strengthen and harmonise
provides directions/guidelines on various the regulatory framework for
provisions of the IRDAI (Registration and Operations reinsurance operations.
of Foreign Reinsurers Branches and Lloyd’s India)
Regulations, 2024 and the IRDAI (Reinsurance)
Regulations, 2018.
June 11, 2024 Master Circular on General Insurance Business: To facilitate a shift from rule
The circular provides guidance on the operational based to principle-based
aspects relating to general insurance products regulations thereby enhancing
subsequent to the notification of the IRDAI the ease of doing business and
(Insurance Products) Regulations, 2024. encouraging innovation, enabling
faster adaptation to changing
market dynamics and allow for
reduction in the response time
for emerging market needs.
June 12, 2024 Master Circular on Life Insurance Products. To provide necessary guidance
on aspects pertaining to
various provisions of the IRDAI
(Insurance Products) Regulations,
2024 pertaining to life insurance
products.
June 19, 2024 Master Circular on Operations and Allied Matters To provide guidance to all REs
of Insurers. on aspects relating to, inter
alia, advertisement, opening of
places of business of Insurers,
outsourcing of activities of
Insurers, grievance redressal,
usage of trade logo, unclaimed
amounts of policyholders,
policyholders’ engagement
and awareness and servicing
of policies in case of exit of
distribution channel.
August 12, 2024 Circular on Prevention of Money-Laundering To reflect the amendments made
(Maintenance of Records) Amendment Rules, in the PML Rules.
2024.

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Annex 3

Date Regulation Rationale

September 05, Master Circular on Protection of Policyholders’ To enable policyholders to know
2024 Interests: The circular specifies broad requirements their rights and obligations at
to be complied with by an insurer under the IRDAI various stages of an insurance
(Protection of Policyholders’ Interests, Operations policy.
and allied Matters of insurers) Regulations, 2024.
4. Pension Fund Regulatory and Development Authority (PFRDA)
Date Regulation Rationale
April 25, 2024 Master Circular - Service Charges for Points of To simplify compliance by merg-
Presence (POPs) under the NPS (All Citizen and ing relevant past directives and
Corporate)/ NPS Lite: The circular serves as a con- revisions into a single document,
solidated directive regarding Service Charges for thereby ensuring clarity and con-
PoPs and includes updates to the charge structure sistency.
for PoPs, aiming to incentivise their active partici-
pation in promoting the National Pension Scheme
and enhancing customer service delivery. Further-
more, the circular provides specific guidelines re-
garding the service charge framework, persistency
charges, and the methods of disclosure to subscrib-
ers.
April 26, 2024 Pension Fund Regulatory and Development Au- To formalise the regulations re-
thority (Mechanism for Making and Review of view process in the authority
Regulations) Regulations, 2024. for the future and to lay down a
framework for review.
May 03, 2024 Appeal with Ombudsman for Resolution of Griev- To enhance transparency, en-
ances under the National Pension System (“NPS”) sure equitable access to dispute
& the Atal Pension Yojana (“APY”): The notifica- resolution and promote sub-
tion defines the roles, powers, and responsibilities scriber confidence by providing
of the Ombudsman in grievance redressal while es- structured and accessible mecha-
tablishing clear timelines, permissible formats, and nisms to address complaints ef-
procedures for appeals. It aims to streamline and fectively.
clarify processes, rights, and obligations under pen-
sion schemes regulated/administered by the PFRDA
by consolidating existing regulations and directives
into one document to ensure ease of compliance
and operational efficiency.

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 Financial Stability Report December 2024

Date Regulation Rationale

May 03, 2024 Extending APY to all Central Recordkeeping To promote competition and ef-
Agencies. ficiency amongst the agencies
registered with the PFRDA.
June 26, 2024 Same Day Investment of the NPS contributions To enhance the efficiency of
(T+0) received by Trustee Bank effective from 1st fund deployment and benefit
July 2024: The notification introduces same-day subscribers through faster in-
investment (T+0) for contributions to the NPS re- vestment.
ceived by the Trustee Bank before 11 AM on settle-
ment days. Previously, investments were processed
on the following day (T+1).
August 01, 2024 Circular on Information & Cybersecurity Policy To mitigate risks from emerging
Guidelines- 2024 for Intermediaries/Regulated cyber threats, enhance data pro-
entities: The circular consolidates and updates tection and maintain subscriber
earlier directives on cybersecurity, incorporating trust.
best practices and aligning with modern regula-
tory and technological standards. The guidelines
also emphasise compliance with global standards,
structured incident response, regular audits, and
alignment with regulations like the Information
Technology Act and the Digital Personal Data Pro-
tection Act.
August 28, 2024 Introduction of the NPS Contributions through To facilitate recurring the NPS
the Bharat Bill Payment System (BBPS). investment, allowing both lump
sum and SIP payments, provid-
ing convenience, accessibility
and cost efficiency to the NPS
subscribers.
September 18, The NPS Vatsalya Scheme: The PFRDA introduced To empower children by offer-
2024 the “NPS Vatsalya” scheme, a contributory pen- ing a structured pension frame-
sion initiative for minors designed to foster a pen- work, to inculcate early financial
sioned society in line with the vision of “Viksit discipline and ensure long-term
Bharat@2047”. With features like low minimum financial security for minors by
contributions, partial withdrawals for education promoting a culture of savings
and medical needs, and flexible options for con- and retirement planning from an
tinuation or exit upon adulthood, the scheme is early age.
tailored to safeguard the financial future of minors.

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Date Regulation Rationale

September 23, Master Circular - Guidelines on Know Your Cus- To strengthen the framework for
2024 tomer / Anti-Money Laundering / Combating the preventing financial crimes and
Financing of Terrorism (KYC/AML/CFT): The circu- enhancing transparency and ac-
lar consolidates and streamlines guidelines related countability within the pension
to KYC, AML, and CFT for entities involved in the ecosystem.
pension system regulated by the PFRDA. It outlines
comprehensive compliance requirements, includ-
ing Client Due Diligence (CDD), reporting obliga-
tions, and record-keeping standards for reporting
entities.

5. Insolvency and Bankruptcy Board of India (IBBI)

Date Regulation Rationale
May 09, 2024 Circular regarding Uploading of Judicial Orders To ensure that important judicial
related to Insolvency Proceedings by the orders which have significant
Insolvency Professionals (IPs): The IBBI issued impact on the ongoing processes
a circular requiring IPs to upload judicial orders under the Code are available for
pertaining to their assignments on the dashboard facilitation of stakeholders and
provided by the Board for this purpose. The the IBBI in a timely manner.
Circular indicates the categories of judicial forums
and types of orders (process milestones, actionable
points for the IBBI or the MCA, important issues
relating to vires, interpretation and applicability of
the provisions of the Code, Rules and Regulations)
that are to be uploaded by IPs.
June 28, 2024 Circular regarding Filing Forms to Monitor To facilitate systematic and
Corporate Liquidation and Voluntary Liquidation transparent record-keeping and
Processes: The IBBI issued two circulars to seamless reporting of corporate
introduce a set of electronic forms capturing liquidation and voluntary
the details and progress of corporate liquidation liquidation processes by
processes and voluntary liquidation processes that liquidators.
need to be filed by liquidators on the electronic
platform developed by the Board for this purpose.

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August 06, 2024 Guidelines for Committee of Creditors (CoC): To foster more effective and
Given that the members of the CoC largely time bound decision making and
represent financial creditors and most of them stem the value erosion, through
are under regulatory oversight of financial sector curtailment of procedural
regulators other than the IBBI, a set of self- delays and enhancement of
regulating Guidelines for CoC were issued by the transparency and coordinated
IBBI for improved functioning of the CoC. The approach of decision making by
guidelines provide for various measures pertaining the members of the CoC.
to objectivity and integrity, independence and
impartiality, professional competence and
participation, cooperation, supervision and
timelines, confidentiality, costs, meetings of the
CoC, sharing of information and feasibility and
viability of the corporate debtor.
August 12, 2024 Circular regarding Generation of Valuation Report To ensure authenticity of
Identification Number (VRIN): The IBBI issued valuations done under the Code
a circular requiring Registered Valuers (RVs)/ and to have a unique reference
Registered Valuer Entities (RVEs) to generate a number for each valuation
unique VRIN for each valuation report prepared report.
by them under the Insolvency and Bankruptcy
Code, using the online module developed by IBBI
for the same. The circular requires the RV/ RVE
to mention the VRIN on the front page of the
valuation report. Further, the IPs shall not accept
any valuation reports without VRIN. The circular
shall be applicable to all the cases where the date
of valuation report is on or after the date of this
circular.
August 13, 2024 Amendment to the Information Utilities (IU) To streamline the process of
Regulations: The IBBI issued the IBBI (Information authentication on information of
Utilities) (Amendment) Regulations, 2024 to, inter debt and default and issuance of
alia, provide for increasing the number of days record of default (RoD) by the IU.
allowed to the debtor to confirm the information
of default, after reminding him at least three times,
from three days to seven days.

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August 13, 2024 Amendment to Inspection and Investigation To streamline the timeline for
Regulations: The IBBI issued the IBBI (Inspection disposal of SCNs by the DC of
and Investigation) (Amendment) Regulations, 2024 the Board.
to modify the timeline for disposal of a show cause
notice (SCN) by the Disciplinary Committee (DC) of
the Board from 35 days of the date of the issuance
of the SCN to 60 days from the due date for receipt
of reply to the SCN.
September 24, Amendment to the Insolvency and Bankruptcy To protect the interest for a
2024 Board of India (Insolvency Resolution Process for particular class of creditors by
Corporate Persons) Regulations (CIRP Regulations): allowing their AR to participate
The CIRP (Second Amendment) Regulations, 2024 in meetings of the CoC in
provide that the IP recommended for appointment the interim period between
by the interim resolution professional (IRP) to act submission of application for
as an interim representative for a class of creditors appointment and approval of
shall be entitled to attend the meetings of the CoC appointment by the AA.
and perform such duties as provided under Section
25A during the period when the application for
appointment of the authorised representative (AR)
is under consideration of the adjudicating authority
(AA) for approval.

6. International Financial Services Centres Authority (IFSCA)

Date Regulation Rationale
April 05, 2024 Circular on Ease of Doing Business - Filing To enhance the ease of doing
of Schemes or Funds under the IFSCA (Fund business for FMEs registered
Management) Regulations 2022: The circular with the IFSCA.
enables the Fund Management Entities (FMEs) to
launch their respective schemes or funds, except
retail schemes, upon filing the documents to the
authority along with disclosures and compliance
with the requirements stipulated in the circular.
April 19, 2024 Circular on Import of Gold and Silver by Indian To permit Indian banks,
Banks through the India International Bullion authorized by the RBI to import
Exchange (IFSC) Ltd. [IIBX]. gold/silver, to directly access
the trading system of the IIBX,
without the need for a Bullion
Trading Member, for undertaking
such import on behalf of their
clients.

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 Financial Stability Report December 2024

Date Regulation Rationale

May 01, 2024 Circular - ‘Qualified Suppliers’ for Supply of To widen the scope of
Bullion on IIBX. participation of the IFSC entities
and pool of suppliers on the IIBX.
May 02, 2024 Circular for Facilitating Investments by NRIs and To facilitate increased
OCIs into Indian Securities through Schemes / investments by NRIs and OCIs in
Funds in an IFSC. the Indian securities through the
IFSC Funds.
May 02, 2024 Issuance of Derivative Instruments against Indian To permit non-bank entities in
Securities by Non-Bank Entities. the GIFT-IFSC, registered with
the SEBI as foreign portfolio
investors, to issue derivative
instruments with Indian
securities as underlying, in the
GIFT-IFSC.
May 08, 2024 Additional Requirements for carrying out the To address the issue of shifting
Permissible Activities by Finance Company as of business activity, presently
a Lessor under ‘Framework for Ship Leasing’: done onshore within India to the
This circular prohibits a Lessor, under the IFSC, without any substantive
‘Framework for Ship Leasing’, to undertake contribution to the overall
transactions which involve transfer, in any form, economy.
of the ownership and/ or leasehold right of a
ship or ocean vessel from a person resident in
India to an entity set up in the IFSC, for the purpose
of providing services solely to person resident in
India.
May 21, 2024 MoU between the IFSCA and the Financial To facilitate co-operation in the
Intelligence Unit - India (FIU-IND). areas of mutual interest including
sharing of relevant information,
conducting outreach and training
activities for regulated entities,
and compliance with each other’s
obligations under the relevant
international standards.

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Annex 3

Date Regulation Rationale

June 14, 2024 Interest on Current account – Amendment to To permit IFSC Banking Units
ACDE Module (Module No.11) of COB Directions to determine the interest rate
v6.0 (IFSCA Banking Handbook). on current account, the manner
of calculation of such interest,
periodicity of credit of such
interest and other related
matters.
July 08, 2024 Direct Market Access (DMA) and Sponsored To expand the scope of the
Access (SA) Facilities for Participants in the IIBX. extant DMA to include Bullion
Exchanges, Bullion Trading
Members and Bullion Clearing
Members within the IFSC.
July 11, 2024 Permission to Participate in the Synthetic To permit IBUs to participate
Securitisation Program of Parent Bank. in the synthetic securitisation
program of their Parent bank
subject to certain prudential
requirements.
July 25, 2024 Credit Rating Agencies in the IFSC. To allow the SEBI registered credit
rating agencies to provide rating
services in the IFSC, requiring
them to register with the IFSCA
and comply with relevant
regulations and guidelines.
July 31, 2024 Circular on Enabling Credit Rating Agencies to To enable credit rating agencies
undertake Additional Activities relating to registered with the IFSCA to
Environmental, Social and Governance (ESG) undertake additional activities
Ratings and Data Products Providers. pertaining to ESG Ratings and
Data Products Providers.
August 29, 2024 The IFSCA (Listing) Regulations, 2024: The To enable Indian and foreign
regulations are expected to promote ease of doing issuers to access capital through
business for the issuers to access capital market issue and listing of securities on
through listing of securities on the stock exchanges the stock exchanges in the IFSC.
in the IFSC with greater flexibility and efficiency.

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Date Regulation Rationale

September 05, Maintenance of Net Worth by Capital Market To specify that all CMIs, who fail
2024 Intermediaries (CMIs). to maintain stipulated net worth,
shall not undertake any existing
or new business activity till the
time, their net worth is restored.
September 24, Trading and Settlement of the Sovereign Green To facilitate easier access for
2024 Bonds (SGrBs) in the IFSC: With a view to facilitate non-resident investors to invest
wider non-resident participation in the SGrBs, a and trade in the SGrBs through
scheme for trading and settlement of the SGrBs in the IFSC, thereby enhancing
the IFSC has been introduced. global climate capital flows into
India.
September 30, Use of Single Window IT System inter-alia for To harmonise and simplify
2024 Registration and Approval from the IFSCA, the the process of submission of
SEZ authorities, the GSTN, the RBI, the SEBI application under various Acts
and the IRDAI: The IFSCA has developed a Single administered by the IFSCA, in
Window IT System (SWITS) which, inter alia, addition to the Special Economic
contains a Common Application Form (CAF), Zones (SEZ) Act, 2005.
created by merging several existing forms including
business-specific Annexure Forms. The SWITS also
integrates within itself a No objection Certificate
(NoC) processing module that will ease the process
of obtaining NoCs, wherever necessary, from the
appropriate regulators viz. the RBI, the SEBI and the
IRDAI.
October 01, 2024 Master Circular for Credit Rating Agencies. To supersede all the circulars and
guidelines issued by the SEBI
(prior to October 01, 2020) in
respect of credit rating agencies
registered with the IFSCA and
to provide guidance on the
regulatory framework for credit
rating agencies to undertake
permissible activities.

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