Tag: RBI Annual Report

RBI Annual Report: Number of frauds in private banks up 21% in FY21

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Overall, the number of frauds in the banking system declined 15% y-o-y by number and 25% y-o-y in terms of value during FY21.

Even as number of fraud cases have declined in the banking system during 2020-21 (FY21), instances of frauds have increased in the private banks, RBI said in its annual report on Thursday. While private banks reported a rise of 21% year-on-year (y-o-y) in the number of frauds during FY21, public sector banks (PSBs) have reported a decline of 34% y-o-y during the same period. In value terms, the private banks have reported a rise of 35% y-o-y in frauds during FY21, and PSBs have reported a decline of 45% y-o-y in the similar period. Overall, the number of frauds in the banking system declined 15% y-o-y by number and 25% y-o-y in terms of value during FY21.

If an account is declared as fraud, banks need to set aside 100% of the outstanding loans as provisions, either in one go or spread over four quarters, as per RBI norms. According to data shared by the central bank, 59.2% of the total value of frauds were reported by public sector banks, followed by private sector banks at 33.5% during 2020-21. Last year, 80% of the total value of frauds were reported by public sector banks and 18.4% by the private sector banks.

As per RBI’s annual report, the average time lag between the date of occurrence of frauds and the date of detection was 23 months for the frauds reported in 2020-21. However, in respect of large frauds of Rs 100 crore and above, the average lag was 57 months for the same period. “In terms of area of operations, frauds have been occurring predominantly in the loan portfolio (advances category), both in terms of number and value,” , RBI said.

Among the key things which tops the agenda of RBI in FY22, the central bank is aiming at enhancement of fraud risk management system, including improving efficacy of early warning signal (EWS) framework. The regulator also wants to strengthen fraud governance and response system. This includes augmenting the data analysis for monitoring of transactions, introduction of dedicated market intelligence (MI) unit for frauds and implementation of automated unique system generated number for each fraud.

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RBI Annual Report: Asset quality of banks needs to be closely monitored, warns RBI

Banking & Finance

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RBI also said that the waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020 may also put stress on banks’ financial health.

The Reserve Bank of India (RBI) on Thursday said that asset quality of the banks would need close monitoring along with their preparedness for higher provisioning in coming quarters.

In its semi-annual financial stability report, RBI had earlier said that the bad loan ratio of banks could rise to 13.5% under the baseline stress scenario by September 2021. The regulator has cautioned banks as lenders will have to show true picture of bad loans after Supreme Court lifted interim stay on classifying non-performing assets (NPA) in March 2021. RBI also said that the waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020 may also put stress on banks’ financial health.

Last year, RBI had announced a six-month moratorium for all term loan borrowers in the wake of Covid impact on borrowers. The Supreme Court had directed lenders to waive compound interest of the borrowers during the moratorium period. The regulator is of the view that banks are better positioned than before in managing stress in their balance sheets thanks to higher capital buffers, improvement in recoveries and a return to profitability. “Stress tests indicate that Indian banks have sufficient capital at the aggregate level even in a severe stress scenario. Bank-wise as well as system-wide supervisory stress testing provide clues for a forward-looking identification of vulnerable areas,” RBI said in its annual report 2020-21 released on Thursday.

The report, however, highlighted that gross NPA ratio of banks decreased to 6.8% by December 2020 from 8.2% in March 2020. Prudent provisioning by banks, even over and above regulatory prescriptions for accounts availing moratorium and undergoing restructuring, resulted in an improvement in the provision coverage ratio (PCR) of banks. Provision coverage ratio has improved to 75.5% at December-end 2020 from 66.6% in March 2020. Adjusting for write offs, the PCR was 88%, up from 81.3% in March 2020.

The capital to risk-weighted assets ratio (CRAR) of banks rose to 15.9% by end-December 2020 from 14.8% at end-March 2020. The capital adequacy ratio of banks was aided by capital raising from the market by public and private sector banks, and retention of profits.

The report also said that gross NPA ratio for non-banking financial institutions (NBFCs) improved to 5.7% in December 2020 from 6.8% in March 2020. Similarly, the capital adequacy ratio of NBFCs marginally improved to 24.8% in December 2020 from 23.7% during the same period last year.

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Covid-19 pandemic fuelled digital payments modes: RBI Annual Report

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The Covid-19 pandemic fuelled the proliferation of digital modes of payments, the Reserve Bank of India noted in its Annual Report 2020-21. The prospects for FinTech in India’s financial system in 2021-22 will depend upon the degree of entrenchment of digital usage, it further said.

“The Covid-19 pandemic has fast-tracked digital transformation of the payments ecosystem in India. Besides augmenting the broad-based use of technology, the pandemic has fuelled the proliferation of digital modes of payment, propelling the country towards ‘less-cash’ alternatives,” the report said.

Overall, the total digital transaction volume in 2020-21 stood at 4,371 crore, as against 3,412 crore in 2019-20, attesting to the resilience of the digital payment system in the face of the pandemic.

Future of fintech

The report noted that the prospects for FinTech in India’s financial system in 2021-22 will depend upon the degree of entrenchment of digital usage, which is, in turn, contingent upon the resilience of the underlying acceptance infrastructure, financial literacy and awareness of the users and strengthening of the customer protection and cyber security protocols in place.

Also read: Demand for cash surged in 2020-21 due to Covid-19 pandemic: RBI Annual Report

“All these factors will help in cementing the trust of users in digital modes,” it said.

The RBI’s initiative to set up a pan-India new Umbrella Entity will intensify competition in the digital space and bring out the best for end users and other participants in terms of efficiency gains and convenience, the report further said.

“Collaborations between card issuing banks, FinTech players and other stakeholders of the payments ecosystem are likely to give rise to a new hybrid model of finance that will help address credit gaps and ramp up last mile outreach by leveraging on the geographical footprint of banks and technological know-how of FinTech companies,” it noted.

In the area of digital payments, various initiatives such as an innovation hub, a regulatory sandbox and offline payment solutions are underway to ensure that in the digital ecosystem, India maintains its position as a leader.

The RBI is also in the process of extending the geo-tagging framework put in place to capture location of bank branches, ATMs and BCs to cover payment system touch points, enabling accurate capture of their location across the country. Further, the possibility of leveraging India’s domestic payment systems to facilitate cross-border transactions is being explored, and corridors and charges for inward remittances will be reviewed.

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Banks’ asset quality will need close monitoring: RBI Annual Report

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Banks’ asset quality will need to be closely monitored in coming quarters, with preparedness for higher provisioning in view of lifting of the interim stay on asset classification standstill by the Supreme Court on March 2021, according to the Reserve Bank of India (RBI).

In its 2020-21 annual report, RBI observed that the waiving of interest on interest charged on loans during moratorium period (March 1 to August 31, 2020) may also impinge on lending institutions’ finances.

“They are, however, better positioned than before in managing stress in balance sheets in view of higher capital buffers, improvement in recoveries and a return to profitability,” the report said.

Stress tests indicate that Indian banks have sufficient capital at the aggregate level even in a severe stress scenario, it added.

RBI emphasised that bank-wise as well as system-wide supervisory stress testing provide clues for a forward-looking identification of vulnerable areas.

The central bank assessed that resumption of the insolvency processes under the Insolvency and Bankruptcy Code (IBC), and the introduction of a pre-packaged insolvency mechanism for MSMEs (micro, small and medium enterprises) to provide an easier resolution channel are expected to bring back the focus on meaningful resolution of stressed assets by the lenders, even as necessary regulatory measures are taken to respond to the fallout of resurgent pandemic.

The report said the envisaged bad bank, the regulatory measures aimed at developing market-based mechanisms for credit risk transfer, such as securitisation, transfer of loan exposures and development of secondary loan market may help in reducing the stressed assets on the bank balance sheets.

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Near-term economic outlook clouded: RBI Annual Report

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The Reserve Bank of India (RBI) said the near-term economic outlook is clouded, with an accentuation of downside risks and potential externalities of global spillovers.

Embattled by new waves of infections and mutant strains of Covid-19, the slow pace of inoculation in several parts of the world and visceral vaccine protectionism, the global and domestic outlook has once again turned grim and overcast with extreme uncertainty and downside risks, according to RBI’s 2020-21 annual report.

The central bank underscored that the onset of the second wave has triggered a raft of revisions to growth projections, with the consensus gravitating towards RBI’s projection of 10.5 per cent for the year 2021-22 – 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4.

It noted that the Covid-19 pandemic itself, especially the impact and duration of the second wave, is the biggest risk to this outlook.

“Yet, upsides also stem from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports,” RBI said.

The central bank observed that over the course of the tumultuous year gone by, there have been learnings and adaptations. Drawing on these lessons gleaned, India can prepare for the year ahead with confidence and fortitude,it added.

RBI opined that: “Faster vaccination holds the key to an escape from the pandemic.”

“Around this centrepiece, public policies must design and implement strategies that put us back on a secure path of strong and sustainable growth with macroeconomic and financial stability so that India is once again engaged in achieving its developmental aspirations.”

Best to prepare for future waves

The central bank cautioned that compared to financial crises, a health crisis can be more pervasive, persistent and debilitating in its impact on the real economy.

“Letting down the guard is perilous; it is best to prepare for future waves,” RBI said.

The report said: “The health crisis has shown us how globalised we are, not only in our vulnerability to viral infections but also in the manner in which vaccines are produced and shared.”

“Excoriating COVID-19 from the earth will need a global effort so that everyone is vaccinated.”

Revive animal spirits

RBI said that private investment is the missing piece in the story of the Indian economy in 2020-21.

“Reviving it awaits an environment in which ‘animal spirits’ are rekindled and entrepreneurial energies are released so that backward and forward linkages and multipliers prepare the ground for a durable investment-driven recovery,” it added.

RBI said fiscal policy (FY22), with the largest capex budget ever and emphasis on doing business better, has swung into a crowding-in role.

“It is apposite now for Indian industry to pick up the gauntlet,” it added.

The central bank said a virtuous combination of public and private investment can ignite a shift towards investment and thereby to a trajectory of sustained growth.

This can be achieved by exploiting the unique point at which the economy is poised – at the crossroads of regaining its place as the fastest growing economy in the world, the third largest in terms of purchasing power parity, with late dividends of demographic transition still accruing, and a strong external position, it added.

As per the report, in 2020-21, India’s stimulus measures cumulated to 15.7 per cent of GDP, including liquidity and other measures taken by RBI. Overall, the total support announced by RBI for the economy since February 6, 2020 (up to May 5, 2021) amounted to ₹15.7 lakh crore (8.0 per cent of 2020-21 nominal GDP).

RBI noted that 2020-21 will go down in history as the year of the Covid-19 pandemic break in the life and ethos of humanity.

“It altered economic activity, finance and, more generally, life and livelihoods in a drastic and deep way that may take several years to heal,” the central bank said.

The pandemic also exposed the fragility of health care infrastructure and the inadequacy of health spending over the years, it added.

RBI said the year 2020 will also be notable for unprecedented policy responses which, although not coordinated, turned out to be synchronised globally

The report emphasised that from this point in time, the global recovery and its outlook, including for India, will be contingent on the pace and coverage of vaccination and its efficacy against emerging variants of the virus.

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