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Indian financial system stable but warrants continued surveillance, says RBI team 

INDIndian financial system stable but warrants continued surveillance, says RBI team 

The Reserve Bank of India (RBI) team that prepared its recent financial stability report has highlighted the remarkable financial stability in India at the current juncture but cautioned over emergent risks.

The team members were speaking at a packed seminar organised by Uruppika, the Centre of Excellence in Macroeconomics, Banking and Finance of the Indian Institute of Management-Kozhikode (IIMK).

Dr. O.P. Mall, executive director in charge of financial stability and statistics; Ayyappan Nair, an expert in systemic risk and is represented on the Global Association of Risk Professionals (GARP); and Sangeetha Mathews, an expert in stress test on banking, were part of the team, according to a press release.

They said 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 were at a decadal high of 1.3% and 13.8% respectively. Capital buffers for banks were strong with a capital to risk (weighted) assets ratio (CRAR) of 16.8%, with a common equity tier-1 ratio of 13.9%.

However, the sharp rise in slippage from retail loans as a share of new NPAs is a concern. Also, 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% at present 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 banks may fail to meet the regulatory minimum capital requirement.

IIMK Director Prof. Debashis Chatterjee stressed the importance of maintaining financial stability, especially since the financial system was undergoing widening and deepening. He added that a sustained focus on NPAs was necessary as once impaired, they ceased to be assets in the true sense and became de facto liabilities of the bank.

Prof. Mridul Saggar, who heads Uruppika, lauded the RBI for covering 46 banks in the stress tests.

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