Reserve Bank of India:Financial Stability Report, June 2015

* Chapter 1:Macro-Financial Risks

Global economic recovery is still weak even after eight years of large-scale monetary accommodation in advanced economies (AEs). This in turn has increased volatility in global financial markets creating challenges for the emerging market and developing economies (EMDEs). Leverage in general has increased since the global financial crisis, though for countries in which interest rates are close to zero or even negative, reducing debt may look less imperative. Developments on the Greek debt crisis and uncertainty over the timing of the rate increase by the US Fed remain immediate possible triggers for volatility in global financial markets and consequent capital outflow and exchange market pressures in EMDEs.

On the domestic front, going forward, economic performance is expected to improve, though managing expectations continues to be a challenge for policymakers. While headline inflation has moderated, price pressures arising from a possible sub-normal monsoon and uncertainties about crude oil prices remain significant risks. External vulnerability has reduced on account of moderation of the current account deficit.

* Chapter II:Financial Institutions: Soundness and Resilience

During the year ended March 2015, banking business slowed down with a decline in both deposit and credit growth. The ratio of gross non-performing advances (GNPAs) of scheduled commercial banks (SCBs) marginally increased between September 2014 and March 2015. The restructured standard advances also increased during the period. The capital to risk-weighted assets ratio (CRAR) of SCBs registered some improvement during this half-year. Public sector banks continued to record the lowest CRAR among the bank groups. Profitability of SCBs, however, remained around the same level during the past two years. The asset quality of scheduled urban co-operative banks improved significantly between September 2014 and March 2015, whereas, the asset quality of non-banking financial companies continued to deteriorate. The banking stability map indicates continued concerns about asset quality and profitability. While stress tests reveal resilience, the system could become vulnerable if the macroeconomic conditions deteriorate sharply.