New Delhi: The revival of twin engines of India’s economic growth — private consumption and investment — while being vigilant about the events and developments taking place in global financial markets remains a critical challenge, the Reserve Bank of India (RBI) said in its December 2019 Financial Stability Report (FSR).
The Reserve Bank, in its report released on Friday, also said aggregate demand has slumped in the second half of the current financial year ending March 2020, adding to an already slowing economic growth.
“While the outlook for capital inflows remains positive, India’s exports could face headwinds in the event of sustained global slowdown but current account deficit is likely to be under control reflecting muted energy price outlook,” the RBI said. “India’s financial system remains stable notwithstanding domestic growth,” the central bank said in the Financial Stability Report.
As far as the global economy is concerned, the central bank said factors such as a delay in Brexit deal, trade tensions, whiff of an impending recession, oil-market disruptions and geopolitical risks caused uncertainties, leading to a significant deceleration in growth.
“These uncertainties weighed on consumer confidence and business sentiment, dampened investment intentions and unless properly addressed are likely to remain a key drag on global growth,” the RBI said.
Despite acknowledging the economic downturn, the RBI said India’s financial system remains stable. The resilience of the banking sector has improved following recapitalisation of public-sector banks by the government, which aims to infuse ₹70,000 crore into state-owned banks this fiscal.
The Reserve Bank said banks’ gross non-performing asset (GNPA) ratio is expected to increase from 9.3% in September 2019 to 9.9% by September 2020, primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.
Provision Coverage Ratio (PCR) of all banks rose to 61.5% in September 2019 from 60.5% in March 2019, implying increased resilience of the banking sector, the RBI said.
However, credit growth for the overall banking sector took a hit amid the slowdown. Credit growth remained subdued at 8.7% year-on-year in September 2019. However, private banks witnessed a double-digit credit growth of 16.5%, the central bank said.
The RBI said it has taken several policy measures to improve the condition of the financial system. “Reserve Bank has initiated policy measures–to introduce a liquidity management regime for NBFCs; to improve the banks’ governance culture; for resolution of stressed assets and for the development of payment infrastructure,” the central bank said in the report.
The issue of bad loans, which slowed the performance and growth of private, public-sector banks and even non-banks, has largely been tackled under the Insolvency and Bankruptcy Code (IBC).
“The Insolvency and Bankruptcy Board of India (IBBI) continues to make steady progress in the resolution of stressed assets,” the Reserve Bank said.