July 08, 2024|Kozhikode: In a balanced message, the RBI team that prepared its recent Financial Stability Report highlighted the remarkable financial stability in India at current juncture but cautioned over emergent risks. The RBI team was speaking at a packed seminar organized by the Indian Institute of Management, Kozhikode (IIMK)’s ‘Uruppika’ – the Centre of Excellence in Macroeconomics, Banking & Finance with its students. The RBI team included Dr. O.P. Mall, Executive Director in charge of financial stability and statistics, Mr. Ayyappan Nair, who is an expert on systemic risk and is represented on Global Association of Risk Professionals (GARP) and Sangeetha Mathews who is an expert on stress test on banking.
At a system level, gross and net Non-Performing Assets (NPA) ratios were at a decadal low of 2.8% and 0.6%, respectively, while Returns on Assets and Returns on Equity (RoE) are at decadal highs of 1.3% and 13.8%, respectively. Capital buffers for banks were strong with a CRAR ratio of 16.8%, with a Common Equity Tier 1 ratio of 13.9%.
However, sharp rise in slippage from retail loans as a share of new NPAs was a concern. Also, as RBI Governor mentioned, the emergent risks from cyber hazards, climate change and global risks need to be closely watched.
While at a system level, scheduled commercial banks can maintain regulatory minimum capital even in case of an extreme adverse scenario of a two standard deviation shock, their CRAR may be eroded from 16.7% presently to 13.3% and gross NPAs could rise from 2.8% to 7.9%. The bank-level stress tests show that six banks with a share of 11.2% in total assets of the bank may fail to meet the regulatory minimum capital requirement.
Prof. Debashis Chatterjee, Director IIMK, stressed the importance of maintaining financial stability, especially as the financial system is undergoing widening and deepening. He added that a sustained focus on NPAs was necessary as once impaired they cease to be the assets in a true sense and became de facto liabilities of the bank.
There were also threadbare discussions at the seminar on methodologies used in the financial stability assessment, including those on stress tests of banks, sensitivity analysis to various shocks, network effects and financial conditions indices.
On the global risk landscape, the RBI team noted that while prospects were improving with disinflation with pitstops on the last mile, high public debt, stretched asset valuations and geopolitical risks and fragmentation exposed emerging markets to external shocks.
Prof. Mridul Saggar, Head Uruppika and the former Executive Director of RBI lauded RBI for covering a large number of 46 banks in their stress tests, pointing out that the US regulators did not even cover its 16th largest bank, the SVB, that collapsed in March 2023 due to losses on its large Treasury portfolio and high concentration of credit risk to the Tech sector that surfaced with falling crypto prices. He, however, voiced his concern at non-activation of countercyclical capital buffer even though credit-to-GDP gap had closed.
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About Indian Institute of Management, Kozhikode (www.iimk.ac.in)
The fifth IIM to be established by Govt. of India in 1996, IIMK started its academic journey in 1997 with its flagship Postgraduate Program (PGP). The Institute is on a high growth trajectory today, offering widest range of academic programs in the field of management education. These include Doctoral Programme in Management (PhD), Executive PG Programmes, Management Development Programmes and Faculty Development Programs. IIMK set up a Satellite campus at Infopark, Kochi, in 2013 dedicated to Executive Education. IIMK has also the unique distinction of launching a PhD (Practice Track) programme for working professionals besides bringing in new dynamic courses like one-year Post Graduate programme in Business Leadership (2019) MBA in Finance and MBA in Liberal Studies & Management (2020). The institute is also home to IIMK LIVE a first-of-its-kind startup incubation programme, the Indian Business Museum and six other Centres of Excellences encompassing diverse areas. IIMK is ranked 3rd as per NIRF India Rankings 2023: Management. The institute also made its global debut for its flagship MBA and EMBA programme in the 2020/21 QS World University Rankings. In 2023, IIM Kozhikode also broke into Top-100 in Financial Times Ranking for Masters in Management (MBA) (Rank #77) and attained global rank #70 in the FT Open Enrollment Programme for 2024. The Institute is globally accredited by EQUIS (EFMD) and AMBA (UK).
