Let us wish our readers a Happy New Year- 2018 and start our discussion on RBI’s Financial Stability Report, December 2017 which covers the distinct recovery made by the world economy effected by its increasing consumption, investment and geographical spread, the other matters such as risks emerging out of volatility in commodity price, and practice of mercantilist approach in place of multilateral trade approaches developed over decades of consistent negotiation among nations. The report, further, aptly covers the current Indian economic growth particularly after the initiation of demonetization and GST measures. Obviously, the current banking scene and the impact of stressed assets on Indian banking and the expected outlook for the future do take a considerable discussing arena in the report.

An easy understanding of the voluminous report, in a simpleton’s language, is the motivation for this article.

Financial Stability Report, December 2017

The above report has been shown in RBI website on December 21, 2017 and contains 103 pages with the following chapters:


List of selected abbreviations



Chapter 1: Macro financial risks

Chapter 2: Financial institutions: Soundness and Resilience

Chapter 3: Financial sector: Regulations and Development


Systematic risk survey


Our analysis may not necessarily follow the above pattern but split its discussion to suit our understanding and find a way to appreciate its conclusion.

Global economy

The continuing growth momentum of global economy has shown promises of sustainability though the Federal reserve, USA, and the Bank of England have taken steps to normalize the monetary policy. The volatile commodity prices have shaken up the emerging markets and simultaneously resulted in historical increase in exports ranking among the best in the last 6 quarters. Debt flows continued uninterruptedly in spite of hard decisions taken by Federal Reserve, USA.

More details to analyze and ponder over:

  • Global output is projected to be increased by 3.7% in 2018 vis-à-vis 3.6% in 2017.
  • GDP in 2017 Q3 showed a growth of 3.3% in spite of ageing population and low productivity.
  • Euro area similarly roared with an annual growth of 2.6%, the highest in nearly a decade or so with Germany of 2.8% and 2.5% for Japan cornering a good attention.
  • For emerging markets, 2017 showcases its best performance since 2011.
  • As per 2017 October report of Organization of Petroleum Exporting Countries, OPEC reference Basket rate reached the highest rate since 2 and half year.
  • International Energy Agency, prophecies a bright energy demand for 2018 visualizing a strong economy during the said period.
  • Similarly, the base metals on a world scale, continued their rally from July 2017 on wards showing an increasing trend.
  • Interestingly, a technology-led-growth is making the world a lot more unequal challenging the post-world war 2 economies around the world.
  • Capital inflows to five large economies of emerging markets since their setbacks, now indicate an increasing trend of showing preference to countries who follow structural reforms in their economies. India, incidentally, with its GST measures and capital recapitalization steps gets extra attention from inflows of capital.

An interesting titbit, funny and a sleigh of humor:

I am exactly reproducing the following paragraph unimaginable in my youth, a couple of decades ago. Just grin and bear it.

“Starting from opacity in communicating even the policy rates to the current evolution to forward guidance, central bank communication has seen a remarkable transformation with researchers currently taking the help of artificial intelligence (AI) to decipher the minds of central bankers through their facial expressions (non-verbal communication). But is this transformation too much of a good thing?

In the context of forward guidance, Hyun Shin (2013) warns of committing a ‘category mistake.’ Shin argues that in most discussions of central banks’ forward guidance, the market is treated as a representative agent with whom central banks can sit down and reason i.e., central banks ignore the heterogeneity of the market agents. Stein (2014) draws on this insight to explain taper tantrums. He posits that even in a market with reasonable median expectations, it is the behavior of the most optimistic investors rather than that of the moderates that drives the prices as they are the ones most willing to take large positions based on their beliefs.”

Indian economy and the resultant Market

Point wise developments or important notes may widen our understanding:

  • Unexpectedly, contrary to economic pundit’s projection of dismay of economic measures, economic growth in 2017 Q2 warmed the hearts of Indian economy watchers with curiosity. None denies the sluggish attitude after demonetization as well as initiation of historic GST measures, ranked as the first real tax reform.
  • Expectedly, decline in investment proposals were noted. But, current leaning towards sinew-straining– decline in number and cost of stalled projects Q2 2017-18, bank capitalization statements, improving the quality of government expenditure, historic upward revision in ease of doing business ranking and India’s upward sovereign rating grade by Moody’s are enormous encouraging measures.
  • Liquidity conditions were buoyed up by demonetization drive. Increased investments in equity and mutual fund markets were welcome developments.
  • Yes, banking stability indicator was at an alarmingly high level. Credit growth of Scheduled Commercial Banks (SCBS) showed improvement during March-September 2017, though, Public Sector Banks (PSBS) continued to lag behind their Private Sector Banks.
  • SCBs return on assets were at 0.4% unchanged during March-September 2017 while PSBs continued their record negative profitability ratios since March 2016.
  • Gross non-performing advances ratio during March and September 2017 was: SCBs increased from 9.6% to 10.2%; Private Sector Banks an abnormal increase of 40.8% as compared to 17% by their PSBs.
  • The macro stress test for credit risk indicated that under the baseline macro scenario, the GNPA ratio may increase to 10.8% in March 2018 with further push to 11.1% in September 2018.
  • India’s financial system remained stable. The stress in the banking sector, particularly the PSBs, while significant, appeared to be bottoming out. A welcome sign.

Now let us discuss the Soundness and Resilience of financial institutions in India, as per the views of RBI Report, of course, simplified for easier understanding:

  • Credit growth of SCBs, on a y-o-y basis, increased from 4.4 per cent to 6.2 per cent between March and September 2017. The public-sector banks’ (PSBs) credit growth increased from 0.7 per cent to 2.2 per cent during the same period reversing the declining trend observed during past two years. Yes, for the gloomy picture of huge stressed assets and virtual no credit growth, this is a very good news.
  • But, the deposit growth showed a declining trend.
  • The gross non-performing advances (GNPA) ratio of SCBs increased from 9.6 per cent to 10.2 per cent between March and September 2017, whereas, their restructured standard advances (RSA) ratio declined from 2.5 per cent to 2.0 per cent.
  • GNPA ratio of PSBs increased from 12.5 per cent to 13.5 per cent between March and September 2017. Stressed advances ratio of PSBs rose from 15.6 per cent to 16.2 per cent during the period. Obviously, not a welcome trend.
  • The asset quality of SCBs deteriorated across broad sectors between March and September 2017 with the industrial sector leading this cohort. But to the pertinent question about the names of industrial sectors cornering this ignominious development, the report pinpoints mining and quarrying, food processing, engineering, construction and infrastructure,
  • However, the recovery in case of sectors like mining and quarrying, food processing, engineering, construction and infrastructure showed an optimistic outlook for the future. Can we presume that not all sectors did not lose?
  • However, I am not surprised to hear that the share of large borrowers both in total SCBs’ loans as well as GNPAs declined between March and September 2017. The total stressed advances of large borrowers increased by 2.4 per cent between March and September 2017. One may presume that RBI itself contributed these developments with its objective of cleaning up the balance sheets of SCBs, with extra steps being taken to monitor PSBs, in particular.

Resilience– stress tests (again from RBI report)

  • A number of single factor sensitivity stress tests (top-down) were carried out on SCBs to assess their vulnerabilities and resilience under various scenarios. The resilience of SCBs with respect to credit, interest rate, equity prices and liquidity risks was studied through the top-down sensitivity analysis by imparting extreme but plausible shocks. The results are based on September 2017 data.
  • Further, the results of tests like Liquidity risk: Impact of deposit run-off on liquid stocks, and Stress testing the derivatives portfolio of banks: Bottom-up stress test have also been given. Any serious minded economic or banking risk managing experts can read the results given under “Chapter II: Financial Institutions: Soundness and Resilience.”

Systemic Risk Survey

The systemic risk survey (SRS), the thirteenth in the series, was conducted during October-November 2017 to capture the perceptions of experts, including market participants, on the major risks presently faced by the financial system. It is interesting to know the perceptions of the experts for two periods, namely, April 2017 and October 2017 to have a reassurance of the present state of affairs of the Indian financial system.

Major risk groups April 2017 October 2017
Global risks medium medium
Macro-economic risks medium medium
Financial market risks low low
Institutional risks Medium medium
General risks Low low

Further analysis of the risks, sector wise, gave further reassuring information, given as under:

  • Perceptions of experts as low or very low risks – sovereign rating downgrade, political uncertainty, governance, policy implementation, other economic risks, liquidity risks, other market risks, other institutional risks, other general risks.

However, the following information showed high risk perceptions of the experts, which on close analysis will even satisfy your curiosity.

  • Asset quality deterioration, additional quality requirements, level of credit growth and cyber- attack


As the detailed study of RBI report reveals Indian financial institutions are on the right track with adequate governance steps taken by RBI/Government or the external factors indication of further improvement in the economy. As the nation, important measures like identification of stressed assets, effective measures taken to take them to a final resolution, surprise provision of capital to various public sector banks by the central government and identification of 10 nationalized banks for close scrutiny by RBI, and the tightening of lackadaisical approach of some private sector banks who have failed to protect the interests of their depositors or inadequate supervision by some private sector banks during demonetization when their managerial staff collaborated with fraudulent customers in conversion of black money into white by RBI indicate that our financial institutions are in the safe hands and our future is bright.

Recent up gradation of the rank of the country in ease of doing business or sovereign up gradation of credit risk of the nation do portray s silver lining of the financial horizon.

I do encourage any serious-minded reader to read the whole report of RBI to understand the finer points of risk management as well as point of views of the brilliant monetary theorists present in RBI to safeguard the financial interest of the nation.


RBI Website:


About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilisation, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specialising in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at [email protected] Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.

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