RBI Governor Shaktikanta Das: ‘Financial sector management requires top priority’, says RBI Governor

MUMBAI: RBI Governor Shaktikanta Das has said that governance in the financial sector should be given top priority. Strong governance is the foundation for stakeholder resilience in the financial system, Das said in the foreword to a report.

The Financial Stability Report released on Thursday highlighted concerns about falling household savings, speculative activity in small-cap and derivatives markets, and an increase in borrowing and lending by non-bank financial firms.

Increase

Noting that household savings declined to 18.4% of GDP in FY2023, from an average of 20% in 2013-2022, the RBI said that to ensure financial stability, it is important to monitor household debt due to rising trend in financial liabilities.

The report highlighted the rapid growth in futures and options volumes, which creates risks for retail investors without proper risk management and potentially impacts the cash market. Short-term options on floating indexes can increase leverage as investor preferences for immediate expiration change.

He also expressed concern about the froth in small-cap stocks. The report indicated that there has been a rapid growth in the number of mid- and small-cap stocks, accompanied by greater inflows into mutual fund schemes targeting these segments. Das said all stakeholders should not only invest appropriately to take full advantage of technological advancements but also take steps to ensure the security and robustness of their systems.

“Efforts must be made to develop an ecosystem that puts customer interests first. Ultimately, maintaining customer trust is the cornerstone of protecting systemic stability,” Das said.

He said the stress test results show that capital levels of banks and NBFCs will remain above the regulatory minimum even under severe stress scenarios.

The stress tests show that the banking sector will be adequately capitalised (CET1 capital of 10.8%) in FY25 even under a severe stress scenario where gross non-performing assets rise to 3.4%. “Today, the financial stability matrix may be at its best, but the real challenge is to maintain and further improve it. Regulators, on their part, remain committed to these targets,” Das said.

The baseline forecasts in the report show that if economic indicators are in line with expectations, the banking system will be in the best shape. Gross NPAs are projected to improve from the 12-year low of 2.8% in March 2024 to 2.5% in March 2025. Banks had a capital adequacy ratio of 16.8% in March 2024, which would drop to 14.4% and 13% in the moderate and severe stress scenarios.

In the non-banking sector, the report pointed out that there are high arrears among borrowers with personal loans below Rs 50,000.