FINANCIAL STABILITY REPORT (FSR) – DECEMBER 2024

GS3 – ECONOMIC DEVELOPMENT

The Reserve Bank of India (RBI) has published its Financial Stability Report (FSR) for December 2024, offering insights into the health, risks, and resilience of India’s financial sector.

What is the Financial Stability Report (FSR)?

• Frequency: Released biannually (June and December).
• Purpose:
  • Evaluates risks to the macroeconomic environment, financial institutions, markets, and infrastructure.
  • Conducts stress tests to ensure the financial sector’s resilience.
• Collaborators: Prepared in consultation with financial regulators such as SEBI, IRDAI, PFRDA, RBI, and the Finance Ministry under the FSDC Sub-Committee.

Key Highlights of the December 2024 FSR

1. Current Economic Context

• GDP Growth: Real GDP growth moderated to 6% in H1 2024-25, down from 8.2% in 2023-24.
• Outlook: Structural growth drivers suggest potential recovery in H2 2024-25.

2. Banking Sector Resilience

• Asset Quality:
  • Gross NPA ratio dropped to 2.6%, a 12-year low.
  • Stress tests affirm that Scheduled Commercial Banks (SCBs) can sustain capital above regulatory minimums even in adverse scenarios.
• Write-offs: Rising write-offs, particularly in private banks, highlight concerns over unsecured loans and underwriting standards.

3. Inflation and Food Prices

• Retail Inflation: Eased to 5.5% (November 2024) due to softer food prices.
• Risk Factors: Extreme weather events could disrupt food inflation dynamics.

4. Adoption of AI in Finance

• Opportunities and Risks: While AI enhances operational efficiency, it introduces challenges like cyber threats and market concentration risks.

5. Equity Market Trends

• Investor Behavior: Domestic investors are focused on short-term returns.
• Challenges: Many individual investors faced losses in derivative markets.

6. NBFC Strengthening

• Non-Banking Financial Companies exhibit healthier balance sheets and resilience in stress tests.

7. Liquidity Challenges

• The banking system faced a liquidity deficit of ₹2.43 trillion (Dec 2024).
• Mitigation Measures: CRR cuts and bond purchases are expected to address the shortfall.

8. Regulatory Compliance

• RBI-imposed penalties on institutions fell by 47%, indicating better regulatory adherence.

9. Future Projections on NPAs

• Gross NPAs may rise to:
  • 3% under normal conditions (March 2026).
  • 5.3% under high-risk scenarios.
• Despite this, banks are projected to maintain capital adequacy above the 9% minimum.

1. Financial Stability Report (FSR): RBI’s biannual publication that evaluates systemic risks and financial sector resilience.
2. Gross Non-Performing Assets (GNPA): An indicator of bad loans; lower ratios reflect improved asset quality.
3. Non-Banking Financial Companies (NBFCs): Institutions offering credit and financial inclusion services outside traditional banking.
4. Kharif and Rabi Crops: Seasonal crops impacting food prices and inflation.