Housing sector

Banking NPAs, housing sector dynamics, crypto risks: key takeaways from the RBI report

The Reserve Bank of India, in its December 2021 Financial Stability Report, released on Wednesday, maintained that the Indian economy has recovered from the second destructive wave of the Covid-19 pandemic in April-May 2021, and as consumer confidence and business optimism grew. But he also noted that banks’ gross non-performing assets, already large at 6.9% in September 2021, could, in the worst case, reach 9.5% by September 2022. He added that even if economic tensions remained the same as at present, the GNPA could still increase to 8.1% during the same period. However, he assured that banks would be able to meet minimum capital requirements even if severe stress conditions arise.
Main highlights of the report:
* The global recovery lost momentum in the second half of 2021 due to the resurgence of Covid-19 infections, in particular the new Omicron variant. Other factors negatively impacting the recovery include supply chain disruptions and bottlenecks, rising inflation, and changes in central bank monetary policy stance and action. advanced economies and some emerging market economies.
* Many emerging market economies are going through difficult times, hit by tougher global conditions, rising energy prices and domestic inflation. Capital flows to these markets have declined while equity flows are volatile. The US dollar has appreciated significantly against many emerging market currencies.
* However, in India, the gradual weakening of the second wave of the pandemic from July 2021, coupled with progress in vaccination, has helped the economy to recover. Overall, from April to October 2021, the fiscal deficit, current account deficit and all other central government deficits have narrowed.
* India’s corporate sector is also getting stronger and has shown resilience during the pandemic. The financial situation of non-financial listed companies has improved. Bank credit is also growing. However, micro, small and medium enterprises (MSMEs) and microfinance institutions are still showing signs of stress.
*While banks’ growing GNPAs are indeed a cause for concern, their capital adequacy position has remained sound. Banks’ capital to risk-weighted assets (CRAR) ratio reached a new high of 16.6% in September 2021, while their provision coverage ratio (PCR) stood at 68.1 %, compared to 67.6% in March 2021.
* The proliferation of private cryptocurrencies around the world is a source of risk, but one that regulators and governments have become well aware of. Not only is customer protection compromised by cryptocurrencies over which central banks have no control, but they can also be used for money laundering and terrorist financing. Given their highly speculative nature, cryptocurrencies can also be subject to extreme price volatility and outright fraud.
* The recovery in consumer credit is driven by demand in the personal loan and credit card segments. In the other product categories as well, demand is stabilizing. Lending activity across all categories of lenders, except public sector banks, shows signs of accelerating credit growth after the second wave.
* The housing market is gaining momentum. After a long period of negative growth, home sales showed the first signs of recovery in the second quarter of 2021-22. The support measures adopted by the government to stimulate the housing sector, a low interest rate environment and improving consumer confidence in the sector have all helped to accelerate demand, leading to a sharp increase in the launch of new housing projects over the past four quarters.
* Despite the uncertain and volatile global economic environment, India’s external sector has remained stable and viable. In 2020-21, the current account deficit was lower than in 2019-20, while net service receipts were higher. Thanks to this, India achieved a current account surplus of 0.9% in the first quarter of 2021-22, compared to a deficit of 1.0% in the last quarter of 2020-21.
* Foreign direct investment (FDI) and bank capital both recorded large inflows during the first quarter of 2021-2022, with foreign exchange reserves reaching $31.9 billion on a balance of payments (BoP) basis. ).
*Despite heightened global uncertainty, the dollar-rupee exchange rate remained stable until mid-November 2021. Since then, however, until around mid-December, the rupee has been trading lower , mainly due to foreign portfolio outflows, a strengthening of the United States. dollar and uncertainty about the rate of cuts by the US Federal Reserve. Overall, the rupee has depreciated by 1.73% since end-June 2021 against the US dollar.
* The bull run in global equity markets across the world also influenced the Indian market, which posted strong rallies with intermittent corrections. Domestic institutional investors (DIIs) were net buyers from April to November 2021, offsetting to some extent the withdrawal of foreign portfolio investors. Mutual funds were the main drivers, while insurance companies were net sellers during this period.