New Delhi, Dec 30 (Mayank Nigam) The global economy and the financial system remain resilient. While near-term risks have receded, vulnerabilities such as stretched asset valuations, high public debt, prolonged geopolitical conflicts and risks from emerging technologies pose medium term risks to financial stability, Reserve Bank of India (RBI) said on Monday releasing a report. The RBI has issued the Financial Stability Report (FSR), reflecting the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on the resilience of the Indian financial system and risks to financial stability. Against an uncertain global backdrop, the Indian economy is exhibiting steady growth, underpinned by solid macroeconomic fundamentals and strong domestic growth drivers, it said in the report. According to RBI, the domestic financial system is demonstrating resilience, supported by healthy balance sheets of banks and non-banks, and fortified by strong capital buffers, robust earnings and improving asset quality.
Vulnerabilities in the form of stretched equity valuations, pockets of stress in the microfinance and consumer credit segments and risks from external spillovers require close monitoring. The Central Bank noted that the soundness of scheduled commercial banks (SCBs) has been bolstered by strong profitability, declining non-performing assets and adequate capital and liquidity buffers. Return on assets (RoA) and return on equity (RoE) are at decadal highs while the gross non-performing asset (GNPA) ratio has fallen to a multi-year low. Macro stress tests demonstrate that most SCBs have adequate capital buffers relative to the regulatory minimum even under adverse stress scenarios. Stress tests also validate the resilience of mutual funds and clearing corporations. Non-banking financial companies (NBFCs) remain healthy with sizable capital buffers, robust interest margins and earnings and improving asset quality, the RBI said adding the consolidated solvency ratio of the insurance sector also remains above the minimum threshold limit. On the issue of technology and financial stability, the RBI is of the view that adoption of artificial intelligence (AI) by companies and service providers can help optimise their operations and resource allocation.
The pace at which AI-based technologies have, however, penetrated business operations and front-end consumer services has evoked concerns about the associated risks to wider public interest. The European Union (EU) enacted the European Artificial Intelligence Act (AI Act) in August 2024, pioneering the formulation of comprehensive regulations around the use of AI. The Act provides for ensuring that any AI system developed and deployed in the EU is reliable and safeguards people’s fundamental rights while creating a conducive environment for innovation and investment. The RBI issued revised directions on Fraud Risk Management for its regulated entities (REs), outlining a comprehensive framework for prevention, early detection and timely reporting of incidents of fraud to Law Enforcement Agencies (LEAs) and Supervisors. These directions further strengthen the role of the Board in overall governance and oversight of fraud risk management in the REs. The directions emphasise the need for instituting robust internal audit and controls framework in the REs and also provide a revised framework for early warning signals (EWS) and red flagging of accounts (RFA) for early detection of frauds. The directions aim to reduce the number of incidences and the impact of fraudulent activities by better equipping institutions to respond to fraud risks with both preventative and corrective measures. The Reserve Bank’s focus on fraud risk management aligns with its broader efforts to enhance financial stability and resilience in an increasingly digital and interconnected economy thereby enhancing customer trust and protecting the financial sector’s integrity, it said in the report.