The RBI recently made its submissions to the Standing committee on Finance to brief on the state of the economy.
What are the submissions made?
On NPA - Both gross and net non-performing assets (NPAs) of scheduled commercial banks have reduced recently since their peak in March 2018.
Also, the proportion of NPAs from Public sector banks has marginally come down from 86.6% to 85.9%. [Image]
However, the profitability of banks was still impacted due to a decline in earnings from loan assets and on higher provisioning required due to deterioration in asset quality.
The slippage ratio (i.e. the percentage of fresh NPAs as percentage of standard advances) is also declining which reflects improving credit discipline in the banks.
On fiscal health - The risks that could pose a challenge to the government’s commitment to meet the FRBM targets are –
Oil prices
Uncertainty over the effect of the MSP hike
Revenue impact of the lower-than-expected GST collections
Cut in excise duty on fuel
Decline in the gross financial savings of households
HRA revisions by the states
Farm loan waivers by states
Thus, the central government debt to GDP ratio target of 40% and the general government (including states) debt to GDP ratio target of 60% by 2024-25 should be focussed upon for achieving the revised FRBM targets.
On demonetisation – It caused a shortfall in the government’s non-tax revenue which has impacted the surplus that RBI could transfer to the Centre.
This is mainly because of the rapid pace of remonetisation and increased cash in circulation(CIC), which accounted for 101.8% of its pre-demonetisation levels in March 2018.
However, there is a sharp increase on the volume of digital transactions, which grew from about 900 million transactions in October 2016 to about 1,750 million in June 2018.
Also, the monetary transmission from the policy rate to the banks’ deposit and lending rates improved during 2017-18 due to the demonetisation-induced liquidity.
On credit flow - Total credit flow from banks to the commercial sector grew at 15.6%, especially the adjusted non-food bank credit.
Adjusted non-food bank credit includes non-food bank credit and total non-statutory liquidity ratio (SLR) investments of banks in commercial papers, shares and bonds/debentures.
This will ease the credit flow and increase private investments in the country.
What is the stand of the RBI Governor?
RBI’s autonomy is important to protect depositors’ interests
Monetary policy has to be the exclusive domain of the RBI
RBI’s reserves are central to maintain its AAA rating.
What should be done?
Profitability of banks will continue to remain under stress as they provide for the bad loans in their books and/or take hair-cuts on recoveries through the insolvency process.
Thus, banks need to monitor their small loans portfolio made under the Pradhan Mantri Mudra Yojana.
