Financial Stability Report

1 Financial Stability ReportIssue No. 24 Reserve bank of India December 2021 Reserve bank of India All rights reserved. Reproduction is permitted provided an acknowledgment of the source is publication can also be accessed through Internet at of this Report may be mailed to by Financial Stability Unit, Reserve bank of India, Mumbai 400 001 and designed and printed at ACME Packs & Prints (I) Pvt. Ltd., A Wing, Gala , Virwani Industrial Estate, Goregaon - East, Mumbai - 400 We are now nearing two years of living with the pandemic. Many aspects of human life have been radically altered. The world has witnessed tragic loss of lives and livelihood, but we have also learnt a lot and adapted.

2 In this period of swings between hope and despair, the indomitable human spirit has prevailed and humanity has undauntedly worked towards improving health and economic well being. Across the world, economic activity has endured the waves of pandemic, buffered by exceptional policy support from governments, central banks and Financial regulators. Challenges have also been brought on by sudden disruptions in supplies and logistics, shortages, job losses and destruction of businesses. The fallout of the pandemic on Financial markets and institutions has been contained but the return to normalcy remains hesitant and uneven across regions and sectors. After the destructive second wave of the pandemic in India in April-May 2021, which interrupted an economic recovery that was gaining a foothold in the second half of 2020-21, the Indian economy is regaining strength and resilience.

3 Consumer confidence and business optimism are on the rise as the spread and scale of vaccination expands. The outlook is progressively improving, though there are headwinds from global developments and more recently from Omicron. Entrenching the recovery hinges on revival of private investment and shoring up private consumption, which remain below their pre-pandemic levels. Inflation remains a concern buffeted as it is by the build-up of cost-push pressures. Strong supply side measures to contain food and energy prices have, however, worked towards moderating these risks. As highlighted in this issue of the Financial Stability Report , Financial institutions in India have remained resilient amidst the pandemic and Stability prevails in the Financial markets, cushioned by policy and regulatory support.

4 Balance sheets of banks remain strong and capital and liquidity buffers are being bolstered to mitigate future shocks, as reflected in the stress tests presented in this Report . In the spectrum of Financial markets that leverage on technology for their functioning, the need for robustness of infrastructure, data security and the soundness of rules and processes are of paramount importance, especially in the face of repeated and potentially crippling cyber attacks. A strong, well-functioning and responsive Financial sector fortifies the foundations of growth and the development of modern societies. While the pandemic induced bouts of volatility, spillovers and heightened uncertainty are challenging, the Indian Financial system has stood up well and remains well prepared to meet the funding requirements of the economy.

5 The process of capital augmentation and building up of liquidity buffers by Financial entities through a combination of instruments is proceeding apace and needs to be sustained. The Reserve bank of India remains resolute and committed in its endeavour to ensure a robust and efficient Financial system that supports strong, sustainable and inclusive growth with macroeconomic and Financial Das GovernorDecember 29, 2021 Financial Stability Report December 2021 ContentsPage List of Select Abbreviations i-ivOverview 1 Chapter I : Macrofinancial Risks 3 Global Backdrop 4 Macrofinancial Developments and Outlook 4 Other Global Macrofinancial Developments 9 Capital Flows and Exchange Rate Volatility 12 London Inter bank Offered Rate (LIBOR)

6 Transition 13 Comodity Markets 14 Private Cryptocurrency Risks 16 Domestic Macrofinancial Risks 17 Public Finance 18 Government Securities and Fixed Income Derivatives Markets 20 Corporate Sector 23 External Sector Developments and Foreign Exchange Derivatives Markets 25 Domestic Equity Market 27 Mutual Funds 29 Banking Stability Indicator 30 bank Credit 31 Wholesale bank Credit 32 Credit flows to MSME Sector 34 Banks Deposit Profile 36 Resolution Analysis 37 Microfinance Segment 39 Non-Banking Financial Companies (NBFCs) 40 Consumer Credit 43 Housing Market 46 Systemic Risk Survey 46 Chapter II : Financial Institutions: Soundness and Resilience 48 Scheduled Commercial Banks (SCBs) 48 Asset Quality 50 Sectoral Asset Quality 51 Credit Quality of Large Borrowers 53 Capital Adequacy 54 Earnings and Profitability 54 Resilience Macro Stress Tests 55 Sensitivity Analysis 59 Bottom-up Stress Tests: Derivatives Portfolio 64 Page No.

7 Contents Primary (Urban) Cooperative Banks 65 Stress Testing 67 NBFCs 67 Stress Test - Credit Risk 69 Stress Test - Liquidity Risk 70 Interconnectedness 71 Financial System Network 71 Contagion Analysis 77 Chapter III : Regulatory Initiatives in the Financial Sector 80 Global Regulatory Developments and Assessments 80 Lessons from the Pandemic 80 Systemic Resilience of Money Market Funds (MMFs) 81 Pandemic Measures: Financial Stability Implications 82 Other International Regulatory Developments 82 Domestic Regulatory Developments 84 Initiatives from Regulators/Authorities 84 Transfer of Loan Exposures 84 Securitisation of Standard Assets 84 Credit Risk Mitigation (CRM)

8 For Derivative Transactions of Foreign bank Branches 85 Scale Based Regulation for NBFCs 85 Opening of Current Accounts by Banks 85 Retail Direct Scheme 86 Customer Protection 86 Integrated Ombudsman Scheme, 2021 86 Default Fund (DF) of CCIL 86 Fintech 87 Enforcement 87 Swing Pricing Framework for Mutual Fund Schemes 88 Other Developments 89 Deposit Insurance 89 Corporate Insolvency Resolution Process 90 Mutual Funds 91 Commodity Derivatives 91 Corporate Bond Market 92 Credit Ratings 93 Insurance 94 Pension Funds 94 Annex 1: Systemic Risk Survey 96 Annex 2: Methodologies 101 Annex 3.

9 Important Regulatory Measures 116 Financial Stability Report December 2021 Page OF Assessment of the Uniform Price Auction Structure of Risk in the Banking Regulation in India The Evolving Landscape88 LIST OF Purchasing Managers Indices (PMI) Trade Dry Economic Surprise EM Asia Financial Conditions Conditions in Major Global in AE and EME Yield in Major Advanced Yield in Major Advanced Central Banks share of Government Debt and 2-year and 10-year US Treasury and OIS Structure - USD Swaption 3-year Rate Projections for Select Liability Classes of EBA & Euro Area Select Mutual Fund Domestic Non-Banks Share of Government Debt and Market Bond Flows and Portfolio Cross - Currency Basis swap.

10 Select Flows to Emerging Perception of Crude Spot and Futures Price Trading Volume for Brent Options at select Strike Prices Commodity and Metal Monthly Food Price in Commodity Linked Investment Obligations of Central Government Dated Government Primary and Secondary Market Curve Shifts between end-March 2021 and December 2021 (up to December 13, 2021) and OIS Risk in Overnight G-Sec of Listed Non- Financial Private Companies - Growth 23 Page No. Profit Margin - Listed Non- Financial Private Profit Margin Listed Private Manufacturing Companies by Borrower , Fixed Assets and Cash Holdings of Listed Private Manufacturing s Balance of Portfolio Investment and 3-month Historical and Implied Volatility Against the US Dollar and Non-Deliverable Daily Forward Trade Outstanding in Investments in the Equity Cash Forward P/E Ratio over 10-year Participation in Equity Market (Ownership by Value)