The banking sector continues to face “significant” levels of stress but the financial system remains stable overall after moves to enhance transparency, Reserve Bank of India Governor Urjit Patel said in the twice-yearly Financial Stability Report.
The report noted the gross non-performing advances ratio of commercial banks -- a measure of stress in the sector -- had increased to 9.1% in September from 7.8% in March, pushing the overall stressed assets ratio to 12.3% from 11.5%.
Stressed assets levels could increase further under baseline case scenarios, especially at state-run lenders, but the overall financial system remained stable after recent moves forcing banks to account for the true extent of bad loans in their balance sheets, the RBI said.
“While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s financial system,” Patel said in the foreword of the report.
Patel also said domestic economic conditions remained “stable”, adding India had seen “significant moderation” in inflation, although he also noted growth momentum “has slackened” recently.
The RBI governor also endorsed India’s shock move last month to remove higher-value notes from circulation, saying it would “impart far reaching changes,” including in boosting digital payments, while acknowledging “the short-term disruptions in certain segments of the economy and public hardship.”
The RBI this month unexpectedly kept interest rates unchanged, saying the economic impact from the so-called demonetisation action would prove just transitory.
The RBI said it would allow the trading of bond options starting January 31, 2017, in the latest move by the central bank to develop the country’s debt markets.
The RBI said market participants would be allowed to trade both exchange-traded and over-the-counter bond options, including for market-making purposes. The move had long been expected after an RBI panel proposed in February that bond options be introduced to provide more hedging options for investors.
India has been keen to develop its fixed income markets and imposed revamped trading rules for bond futures in January 2014.