RBI gives a warning against bad loans; soaring markets seem to threaten financial stability.

India’s central bank, The Reserve Bank of India, warned of the increase in the number of bad loans and soaring financial markets in the nation’s already weakened economy which tends to threaten financial stability. In its semiannual Financial Stability Report that was published on Monday, The Reserve Bank of India said that the non-performing asset ratio is expected to rise by 13.5% by the end of September from the 7.5% growth that happened a year ago. If this number holds through the entire fiscal year that ends in March 2022, it would be the worst since 1999.

The Reserve Bank of India said that, domestically, corporate funding has been well protected by certain policy measures and the loan moratorium that was announced during the pandemic caused by Covid-19, but warns that stresses would be well visible with a lag. They added that this will have implications for the banking sector because the banking sector and the corporate sector’s vulnerabilities are interlinked.

Being hit by the pandemic, like India’s all other global peers has weakened India’s economy drastically.  Banks entered the new financial year already weakened by a two-year-old lending crisis and are now seen to struggle with one of the worst bad-loan ratios among major nations.

In response to this, the Reserve Bank of India has taken unparalleled and unmatched steps to help their lenders, including a loan repayment moratorium that ended in August. This was followed by a two-year program for debt-restructuring. These measures have made it a lot harder to assess the extent of the bad-debt issue. Most banks have managed to raise a fair amount of capital in the past six months. Private lenders led the pack, who were then followed by state-run peers, including the country’s largest lender State Bank of India, which is a government-owned bank and which raised funds through additional Tier 1 bond.

Mr. Das has further cautioned us about a growing disconnection between certain sections of the financial markets and the original economy.


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