A peek into RBI’s Financial Stability Report

Article from Economic Times

The Reserve Bank of India’s latest financial stability report (FSR) offers a mixture of comfort and discomfiture. While macroeconomic conditions have improved, the financial sector shows continued and growing weakness, primarily on account of poor corporate health and indebtedness. Large borrowers are the worst offenders: their share in total bad loans rose to 87.4% in September from 78.2% in March, and that is a worry for lending institutions. This points to the urgency of legislating the bankruptcy code that was introduced towards the end of the just-concluded Winter session of Parliament.

Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring, says RBI governor Raghuram Rajan in his foreword to the report. Rajan has been warning against sharp practices that pushed banks into extending disproportionately high levels of credit to promoters who had much less skin in the game during the boom period. Capital expenditure of companies has fallen and their profitability is down. The pressure on asset quality continues to be the biggest impediment in improving the performance of banks, especially the PSBs, says the report. Banks need more capital to make extra provisions for bad loans, besides to shore up capital in general, to which end, the FSR urges restraint on dividend payments. Long-term projects must be funded by bonds, not bank credit.

Stress tests suggest that the financial system is resilient to shocks for now, but things could go awry if growth does not sustain, if cyber vulnerabilities give way to attacks, or drought or floods damage crops enough to spike inflation. This is sanitised speech. In plain English, if the government and the Opposition continue to behave as if political one-upmanship matters more than the economy, India is headed for serious trouble. Roads and the Railways are two sectors that show signs of pushing growth without support from new laws or additional public funds. The least the government can do is to give them all the autonomy they require to do their job.

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