RBI financial stability report: Key takeaways

The Reserve Bank on Friday released its 25th edition of the financial stability report (FSR). The report comes at a time when Indian economy is reeling under worrying trends in GDP growth figures and low rates of consumption. 

Record rise in bank frauds

Frauds reported by banks during the first half of the current fiscal touched an all-time high amount of Rs 1.13 lakh crore, owing to delay in detection by lenders, said the RBI report. This involved 4,412 fraud cases of Rs 1 lakh and above, as per the report.

In FY19, banks had reported 6,801 cases of fraud involving Rs 71,543 crore. "An analysis of the vintage of frauds reported during the FY19 and H1 FY20 shows a significant time-lag between the date of occurrence of a fraud and its detection," FSR said. The amount involved in frauds that occurred between FY01 and FY18 formed about 90.6 per cent of the frauds reported in 2018-19 in terms of value.

Similarly, 97.3 per cent of the frauds reported in the first half of FY20 by value occurred in previous financial years. During the first half of 2019-20, banks reported 398 cases of large value frauds (above Rs 50 crore) worth Rs 1.05 lakh crore.

Lenders reported 21 cases of frauds above Rs 1,000 crore, worth a cumulative Rs 44,951 crore. The report said loan-related frauds continued to dominate in aggregate, constituting 90 per cent of all frauds reported in FY19 by value and 97 per cent of all frauds reported in H1 FY20.

The RBI is taking steps to integrate fraud reporting of NBFCs and urban co-operative banks in its central fraud registry database. Such interlinking would serve as an invaluable resource in effective fraud detection/monitoring, it said, adding, "a greater thrust has been put on improved governance."

Falling govt revenue

The RBI has flagged falling government revenue as a threat to the overall fiscal numbers—with tax and non-tax revenues lagging way behind targets—saying this along with weaker private consumption and investment could prove to be a challenge in the current economic scenario. 

The warning assumes importance from many angles as revenue mop-up has been falling and budgeted expenditure (fiscal deficit) has crossed 107 per cent as of November, putting a big question mark on the government ability to meet the 3.3 per cent fiscal targets.

The negative comments are also prescient as GST collection which has been the mainstay of the government has grown just 2.5 per cent so far this year, against a budgeted 14 per cent, while massive corporate tax cuts have given away Rs 1.45 lakh crore of budgeted revenue and has slipped 5.2 per cent as of the third quarter.

What is more pertinent is the divestment revenue. Of the Rs 1.05 lakh crore budgeted for the year, only 17 per cent have been achieved so far.

The only silver-lining is the personal income tax collection, which has growing marginally to Rs 33,000 crore from Rs 24,000 crore. Cumulative advance tax collection till Q3 stood at Rs 2.51 lakh crore as against Rs 7.96 lakh crore year-on-year.

Direct tax collections, net of refunds, for this fiscal grew a mere 0.7 per cent till December. The target is Rs 13.35 lakh crore. Refunds increased 26.6 per cent compared to the same period last year.

Gross direct tax collection till Q3 touched Rs 8.34 lakh crore against Rs 7.96 lakh crore in the same period last year. But net tax collection stood at Rs 6.57 lakh crore compared to Rs 6.7 lakh crore, according to media report quoting taxmen.

"While the fiscal deficit numbers have improved over the years, revenue shortfall amidst weaker private consumption and investment could challenge fiscal parameter," the RBI said in its 25th edition of the financial stability report released on Friday.

"The nation's financial system remains stable notwithstanding weakening domestic growth," the FSR said, adding all major risk groups such as "global risks, risk perceptions on macroeconomic conditions, financial market risks and institutional positions" were perceived as medium risks affecting the financial system.

However, perception of risks on various fronts like domestic growth, fiscal, corporate sector and banks' asset quality increased between April and October 2019, it said. Amidst all these, growth has been screeching south with GDP hitting a 25-quarter low of 4.5 per cent in Q2 forcing a rash of growth revisions ranging from 4.6 to 5 per cent for the year-a steep fall from 7.4 per cent by RBI itself.

This extended sequential quarterly deceleration was led by a sharp slowdown in gross fixed capital formation and sluggishness in private final consumption expenditure.

The report also notes that the slowdown would have more pronounced had it not been for government consumption, which provided a cushion to slackening demand conditions. Noting that merchandise exports have contracted by 2 per cent in April-November as against an expansion of 10.9 per cent a year, the report warns that with global growth and trade projected to slow down further, exports could face challenging demand conditions going forward.

All this has both trade deficit and current account deficit rising to 2 per cent of GDP from 0.7 per cent in the preceding quarter. Net capital flows were higher in Q1 with net FDI inflows of $13.9 billion compared to $9.6 billion in the corresponding quarter of the previous year.

Overall, net capital flows exceeded CAD financing requirements and led to an accretion of foreign exchange reserves, which is at an all-time high of $454.9 billion as of December 20.

The central bank, however, said amidst all these negatives the nation's financial system remains resilient with the asset quality of banks improving (NPAs remaining stable at 9.3 per cent as of September as same as March 2019) thanks to the efforts of both banks and companies to clean up their balance sheets.

On the credit, the report says gross loans and advances noticeably slowed from 13.2 per cent in March 2019 to 8.7 per cent in September 2019.

But the report warns that the gross NPA ratio may rise to 9.9 per cent by September 2020 from 9.3 in September 2019.

"The stress tests indicate that under the baseline scenario, the GNPA ratios of banks may increase to 9.9 per cent by September 2020, due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth," the report said. 

System-wide credit losses to lenders rise in realty

In more troubles for the crippled realty sector, system-wide credit losses to lenders have jumped to 7.33 per cent in June 2019 from 5.74 per cent in June 2018. This spike has been led by state-run banks, whose impairment has jumped from 15 per cent in June 2018 to 18.71 per cent in June 2019.

If we look the numbers from June 2016, the system wide losses stood at 3.90 per cent and for PSBs, it stoodat 7.06 per cent, which since then has been on a steady climb-increasing to 4.38 per cent and 9.67 per cent respectively in June 2017.

The FSR said the numbers are based on an analysis of 310 real estate borrowers and the impairment numbers are based on 90-days past due.

While the aggregate exposure to realtors approximately doubled, the aggregate share of HFCs and PVBs increased and PSBs' aggregate share came down sharply. This might, however, understate the exposure of PSBs to the sector given their exposure to a few NBFCs well entrenched in the real estate sector, says the report.

Fund flows to the sector have continued notwithstanding a general slowdown in credit growth. Since September 2018 when the IL&FS induced risk aversion was noted, all categories of financial intermediaries have increased their exposures to realtors, the sharpest being that of HFCs.

The aggregate impaired exposures continued to rise steadily over the period, with delinquency levels of all financial intermediaries higher as on June 2019 compared to their June 2018 levels. Given the structure of the sample this should be indicative of the evolution of general industry-wide portfolio health rather than health of the real estate exposure in specific financial intermediaries, says the report.

To conclude, the report says analysis of 310 real estate related borrowers show increased stress although the aggregate exposure to the sample firms continued to increase, implying availability of credit. 

(WIth PTI inputs)