According to the Financial Stability Report, India’s financial system is very strong
In the last week of June 2024, on June 27, the Reserve Bank of India (RBI) released its Financial Stability Report. This report is published biannually, every six months. The report states that the Indian economy and financial system remain robust, with better balance sheets enabling banks and financial institutions to effectively drive economic activity through loan expansions.
As of March 31, 2024, the capital adequacy ratio of scheduled commercial banks in India stood at 16.8%. The gross non-performing assets (NPA) ratio hit a multi-year low of 2.8%, and the net NPA ratio dropped to a record low of 0.6%. Not only are the scheduled commercial banks strong, but non-banking financial companies (NBFCs) also remain healthy, with a capital adequacy ratio of 26.6%, a gross NPA ratio of 4.0%, and a return on assets of 3.3%.
The strong capital adequacy ratios indicate that banks have sufficient capital to withstand economic shocks, while the low NPA ratios suggest that loans are being repaid on time without significant stress.
However, the RBI report also highlights certain risks emerging within the Indian economy. Globally, many developed countries continue to implement tight monetary policies, maintaining high-interest rates as inflation rates have not yet fallen to acceptable levels. For India, these risks are somewhat mitigated due to the country’s success in reducing inflation rates. Yet, post-COVID-19, Indian citizens face increased debt burdens, and there is a noticeable decline in the financial savings rate. The report particularly draws attention to these two risks.
According to the RBI, the household savings rate fell to 18.4% of GDP in FY 2022-23, down from an average of 20% between 2013 and 2022. Similarly, Indian citizens saved an average of 39.8% of their earnings between 2013 and 2022, but this dropped to 28.5% in FY 2022-23. Savings can be categorized into financial savings and savings for asset creation. While financial savings have decreased, savings for asset creation have increased, with more middle-class families saving for housing and car purchases. This trend has spurred economic activity, boosting consumption of materials like steel and cement and thereby creating employment opportunities.
The decline in financial savings is also due to greater financial literacy among citizens, who now prefer investing in capital markets and assets like gold and silver for higher returns rather than traditional bank and post office savings. Additionally, middle-class families are spending more on education and healthcare, leading to a reduced overall savings rate. Consequently, net financial savings saw a substantial decline of 11.3%, standing at 28.5% in FY 2022-23, compared to an average of 39.8% over the past decade.
During the COVID-19 lockdown, the household savings rate surged to 51.7%. However, post-pandemic, citizens increased their spending and asset investments, leading to a significant drop in the savings rate. Banks have also relaxed their loan criteria, making it easier for citizens to obtain loans for investments. This has maintained the loan growth rate above 15%, while the deposit growth rate has declined, affecting the incremental loan-to-deposit ratio, which now hovers around 100%.
Another emerging aspect is the recognition of environmental changes as a financial risk. Climate risks and cyber risks are now being regarded as serious threats. In the future, these risks could exert significant pressure on the Indian financial system. Climate change could impact India’s monetary policy, increasing the financial system’s risk exposure.
The author is an expert in economic affairs.
