Analysis/Assessment of

Financial Stability Report - Issue 18

Team: - BITS PILANI GOA CAMPUS

Yash Agarwal, Nishchay Mehta, Shivang Gupta, Patil Tina Sanjay

Abstract: - The objective of this paper is to analyze the Issue 18 of

the Financial Stability Report and narrow down to the authors’
interpretation and judgement about the facts presented in the
report. Special focus has been made on the scrutiny of the
soundness of domestic banking industry using CAMEL approach.
This study also gives critique about the domestic regulatory
developments with providing suitable suggestions of tackling
obstacles using technology.

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 Table of Contents:

i. Introduction …………………………………………………………. 3
ii. Global Scenario ……………………………………………………. 3
iii. Domestic Scenario ………………………………………………… 4
iv. Financial Institutions: Soundness & Resilience ………………… 7
v. Analyzing Soundness in Indian Banking ………………………... 9
vi. Financial Sector: Regulations & Developments ………………. 15
vii. Conclusion ………………………………………………………… 18
viii. Appendix …………………………………………………………... 20

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Introduction
The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability
and Development Council (FSDC) on risks to financial stability, as also the resilience of the
financial system. The Report also discusses issues relating to the development and
regulation of the financial sector. The following analysis tries to interpret, verify and justify
several parts of the FSR and also provide with suggestions and feedback wherever
required.

Global Scenario:

The global growth outlook for 2018 and 2019 remains steady. Fiscal consolidation remains
important for financial stability as global financial conditions turn adverse. The asset quality
of banks showed an improvement with the gross non-performing assets (GNPA) ratio of
SCBs declining from 11.5 per cent in March 2018 to 10.8 per cent in September 2018.
Steady global growth for 2018 and 2019 can be because of higher U.S. interest rates, a
stronger U.S. dollar, and financial market volatility that could bring pressure in some
emerging-market and developing economies. A worsening of these developments, or an
unanticipated rapid monetary policy tightening in advanced economies has dampened the
investors’ sentiment.

The U.S. - China trade war has impacted global macro-economic scenario in many ways.
Also, uncertainty caused by two U.S. trade deals — the US-Mexico-Canada Agreement,
and the US-Europe trade deal may cause a slight economic downturn. Some of the
gyrations in the global financial markets include Fed rate hikes, volatile oil prices,
intensifying trade conflicts and sanctions.
US Fed rate hikes would result in higher borrowing costs for countries and corporates
heavily reliant on foreign debt. The Asian region would face higher financing costs for
investment and higher effective discount rates, which would lower asset valuations and
weaken the region’s corporate balance sheets. With a gradual normalization of the global
monetary policy, the possibility of a substantial increase in the supply of USD denominated
safe assets concurrent with a robust US fixed income issuance across high yield and
investment grades poses risks of pushing treasury rates higher and corporate spreads
wider while impacting the US dollar. The US Federal Reserve’s monetary policy
normalization process will have uncertain impact on capital flows to emerging markets.
Shrinkage in the balance sheet accounts for most of the impact on portfolio flows. Reduced
availability of foreign capital could make it more difficult for emerging market economies to
finance their deficit.

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The decline in crude oil prices was due to increased production to an all-time high by Saudi
Arabia, Russia and the U.S. under pressure from Trump after U.S. sanctions on Iran. The
U.S. started producing a huge quantity of shale oil that got the oil in excess supply and
brought down oil prices. Falling oil prices can also be because of the slowdown in global
economic growth, especially in India, Brazil and Argentina.

The spread between 3-month interbank rate and 3-month OIS which outlines the
idiosyncratic money market liquidity induced risk has shown an upward movement since
September 2018.The effect in money market rates is magnified due to banks’ possible
precautionary motive to hoard liquidity against the backdrop of potential drawdown from
substantial confirmed credit lines extended to non-bank financial intermediaries.

Domestic Scenario:

On the domestic front, growth in gross domestic product (GDP) slowed down to 7.1 per
cent year-on-year (y-o-y) in Q2:2018-19 from 8.2 percent in Q1:2018-19. Growth of gross
value added (GVA) at basic prices decelerated to 6.9 per cent in Q2:2018-19. This was
mainly due to drop in manufacturing, agriculture and mining activities. The registered
growth was over 7 per cent on a YoY basis in Q2. Weak rupee, rising crude prices and
tight liquidity conditions in the financial markets impacted private consumption. The high oil
prices in this quarter resulted in a higher import bill and falling of the rupee. An uneven and
sub-par monsoon and flooding in some areas were factors responsible for muted
agricultural growth. The global PMI indicates that operating conditions improved very slowly
since May, thus reflecting slower gains in output and new orders, according to a survey.
India’s manufacturing activity slowed down in August following a softer rise in output and
new orders, with oil prices and monetary policy tightening affecting investor and public
sentiment. The key factors of risk are trade conflict, inflation risk in Advanced Economies
(AEs) and their monetary policy normalization and central banks’ balance sheets. Holdings
of manufactured goods in India decreased again towards the end of the year as firms
sought to fulfill orders from stocks.

Distribution of banks GNPA ratio shows that the number of banks having GNPA ratio less
than 10 per cent has gone down in September 2018 as compared to March 2018. GNPAs
of state-run lenders improved to 14.8 per cent in September 2018 from 15.2 per cent in
March 2018. As of September 2018, provision coverage ratio (PCR) of all banks was higher
as compared to 51 per cent in March 2018, with improvements noticed for both state-run
banks and private sector banks. The capital to risk-weighted assets ratio (CRAR) of banks
declined marginally from 13.8 per cent in March 2018 to 13.7 per cent in September 2018.
The fiscal deficit has been brought down sequentially from 4.1 percent of the GDP in 2014-

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15 to 3.9 per cent in 2015-16, and further to 3.5 per cent in 2017-18. India remains a
relatively high debt and high deficit country among similarly rated countries.

The current account deficit (CAD) to GDP ratio fell to a twelve year low in 2016-17 after
having increased precariously to 4.8 percent of GDP in 2012-13 and widened to a four year
high in 2017-18 driven by merchandise trade deficit. The CAD increased to 2.7 per cent of
GDP in H1:2018-19 from 1.8 per cent in H1:2017- 18 on the back of widening of the trade
deficit. Merchandise trade data for the period April 2018 - October 2018 also suggests
some revival of growth in major components of imports suggesting some pick-up in
domestic demand relative to 2017-18. Outlook for international crude oil prices feeding into
input costs remains uncertain with potential implications for India’s terms of trade which
worsened in H1: 2018-19.

April-November 2018 witnessed a substantial outflow by FPIs from both Indian equity and
debt markets, except in July, August and November. The sell-off intensified during
October, when equities worth USD 3.9 billion were sold by FPIs. This sell-off followed
foreign portfolio investment (FPI) outflows of USD 1.5 billion in September. Relatively, India
is an underperformer with regard to equity flows specifically in comparison with Russia and
Brazil. Foreign investors invested a large amount of capital into Indian capital markets in
November 2018, after removing large funds in October, with falling crude oil prices and a
strengthening rupee. A large number of these funds were invested in the debt market by
foreign portfolio investors (FPIs). Foreign institutional investors (FIIs) were net buyers of
Indian equities in July. Comparatively, FII selling in the debt markets was lower. FII net
inflows into equities were small. The outflow in September was because of global trade
tensions, widening current account deficit due to increase in oil prices, depreciating rupee,
concerns over the government's ability to meet fiscal deficit targets and less than expected
GST collection. This together with expensive valuation caused a sell-off from FPIs in
September.

After declining in 2016-17, the banks’ share in reported flow of credit, increased sharply in
2017-18 possibly owing to the large recapitalization of public sector banks (PSBs)
undertaken during the financial year. A significant part of the increase in non-bank sources
of reported credit (domestic) witnessed during 2017- 18 was because of the increased data
coverage of government non-banking financial intermediaries. During 2018-19 (till mid-
November), the relative proportion of domestic bank and non-bank resources was almost
evenly matched. the share of net credit by housing finance companies (HFCs) in the total
flow of credit (from domestic sources) nearly doubled from 6.2 per cent in 2013-14 to 11.7
per cent in 2017-18. The share of foreign resources in the total flow of credit to the
commercial sector was largely range-bound between 16-19 per cent during the period
under observation, with foreign direct investment (FDI) being the dominant contributor.

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Mutual Funds have about 65 billion rupees of IL&FS group exposure out of a total debt of
around 900 billion rupees. Debt and liquid/money market funds have a dominant share
which has remained mostly stable and as on September 2018 constituted 51 per cent of
the AUM. High net worth individuals/corporates/banks and financial institutions constituted
around 90 per cent of the total corpus for debt funds (as on September 2018) whereas for
liquid/money market funds the proportion of the same cohort was greater than 95 per cent.
In sharp contrast to the investor profile in debt and liquid/money market funds, close to 50
per cent of the investors in equity funds comprise retail investors. The growth in the debt/
money market mutual funds’ AUM shows that the valuation done by mutual funds in an
illiquid corporate bond market is by and large representative of market.

There has, however, been a pick- up in house sales in H1:2018-19. The recent spike in
launches is mostly driven by government schemes to promote affordable housing. The
sales to unsold inventory ratio have improved for major cities like Mumbai, Pune and quite
distinctly for Hyderabad. Kolkata witnesses a drop in this ratio.

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Financial Institutions: Soundness and Resilience

Chapter II of the Financial Stability report focuses on analyzing the health and potential risk
to the financial system of India. The financial system of the country has been analyzed
upon various parameters which include their performance in terms of credit growth,
Projected Gross Net performing assets (GNPA ratio) against macroeconomic shocks, their
performance in the MSME sector and finally a contagion analysis of the financial network
structure of the country to estimate the solvency/liquidity losses caused by PSB default in
absence of sovereign backing.

Credit growth of banks has improved between March and September 2018 which was
largely driven by private sector banks. The public sector banks also witnessed an overall
improved credit growth form (5.9 per cent in March to 9.1 per cent in September) however
there has been a negative growth rate in credit and deposit for PCA public banks, further
widening the gap between PCA-PSB and non-PCA PSB.

Profitability ratios of SCB's continued to be impacted, however, there was an improvement

from their March 2018 levels. Private sector banks experienced a decline in profitability
ratios mainly due to increased provisioning against bad loans.

Overall improvement in asset quality was witnessed by both private and public sector
banks with the gross non-performing ratio declining from 11.5 per cent in March to 10.8 per
cent in September 2018. A sectoral asset analysis shows an improvement in asset quality
of industry whereas that of agriculture and retail sector deteriorated.

The banking stability indicator indicates improvement in the asset quality of banks although
profitability continues to erode.

The resilience of the Indian banking system was tested against macroeconomic shocks
through stress-test for credit risk which included one baseline and two adverse
macroeconomic risk scenarios. Under the baseline scenario, CRAR is projected to come
down and further deterioration under severe stress scenario is projected.

As many as eight PSB's under prompt corrective action may fall below the minimum
regulatory level of 9 per cent without considering recapitalization by the government,
however, if conditions deteriorate ten out of eleven banks may record CRAR below 9
percent under the severe macro stress scenario.

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A 2 SD shock on GNPA ratio will bring about the CRAR ratio of 18 banks mostly PSB's
below 9 per cent, while the private banks experience less than 3.1 per cent shift in CRAR
ratio making PSB's more vulnerable to macroeconomic shocks. The sectoral credit risk
analysis showed that the metal segment will lead to the decline of 25 basis points in system
level CRAR under severe 2 SD shock whereas power sector exposure will lead to 19 bps
decline in system level CRAR.

MSMEs:

Liquidity Crisis in MSMEs has led to unconstrained Credit Extension to MSME Sector, even
for most PCA banks. The RBI had highlighted continuing stress in the MSME sector where
NPAs for the micro-segment (exposure less than Rs 1 crore) increased to 8.7 per cent in
June 2018 from 7.9 per cent in March 2016 and that for the small and medium-sized
enterprises (SME) segment (exposure of Rs 1-25 crore) jumped to 11.5 per cent from 9.8
per cent. From lender’s perspective, the analysis of MSMEs portrays that performance of
PSBs in the MSME segment trails that of private banks and non-banking financial
companies (NBFCs). It also has focused on targeted monitoring of segmental (MSME)
performance, with regards to growth rate as well as Quality, given the importance of the
health of PSBs.

Financial Network:

“Bilateral Exposures” increased in 2018. The network analysis indicates that the degree of
interconnectedness in the banking system has decreased gradually since 2012. The joint
solvency-liquidity contagion analysis shows that the losses due to the default of a bank
have declined. Based on the analysis of the financial network structure for the period
September 2017 - September 2018, the RBI report showed a shrinking inter-bank market
and increasing bank linkages with asset management companies-mutual funds (AMC-MFs)
for raising funds and with NBFCs for lending. SCBs have continued to be the dominant
players accounting for nearly 47 per cent of the bilateral exposure followed by asset
management companies managing mutual funds, NBFCs, insurance companies, housing
finance companies and all-India financial institutions.

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 Analyzing Soundness in Indian Banking:
A CAMEL Approach
The Indian Banking Sector has been supporting the Indian economy helping it survive
several national and worldwide economic shocks and meltdowns. Through the years it has
maintained a healthy performance seeing the tremendous competitiveness, growth,
efficiency, profitability and soundness in worldwide banking industry. Vast studies of the
banking sector highlight several aspects, with recent literature referring to its convergence
and soundness. FSR and literature to a great extent, have established different
relationships between these and key macroeconomic and financial variables. Chapter II of
the Financial Stability report focuses on analyzing the health and potential risk to the
financial system of India. The financial system has been analyzed upon various parameters
and the resilience has been tested against macroeconomic shocks through stress-test
which holds close relation to the current soundness of the system.

Soundness is a key factor in any financial sector. One of the major measures of economic
development and financial growth of a country has been the soundness of it banks.
Soundness of the banking sector is synonymous with efficiency, productivity, profitability,
stability and a shock free environment. Achieving stability in banking is only the beginning
of a sound banking system. The main goal of banks today is to maintain stability and make
sure they are impervious to external shocks while at the same time being internally sound
and sensible. Hence, it is important to measure soundness across various banks in the
country, identify the weaker sections of the banking sector, devise appropriate strategies
and policies to lift these sections and eventually create an environment that leads banks to
converge in soundness and result in a consistently stable system.

Research Methodology:

This study draws a comparative analysis among all the banks using internationally
accepted CAMEL rating parameters to understand the financial soundness of the
commercial banks.

CAMELS is an acronym for six measures (capital adequacy, assets quality, soundness,
earnings liquidity and sensitivity to market risk). The analysis thus reflects the soundness of
the institutional framework.

Twelve commercial banks were selected purposively for the study. The banks selected for
the purpose for the study are traded in National Stock Exchange and are part of NIFTY
Bank Index (http://www.niftyindices.com/indices/equity/sectoral-indices/nifty-bank). NIFTY

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Bank Index is an index comprised of the most liquid and large capitalized Indian Banking
stocks.

The Banks selected for the purpose are Axis Bank Ltd. (AXISBANK), Bank of Baroda
(BANKBARODA), HDFC Bank Ltd (HDFCBANK), ICICI Bank Ltd (ICICIBANK), Kotak
Mahindra Bank Ltd (KOTAKBANK), Punjab National Bank (PNB), State Bank of India
(SBIN), Indusind Bank (INDUSINDBK), Federal Bank (FEDERALBNK), RBL Bank
(RBLBANK), Yes Bank (YESBANK), IDFC Bank (IDFCFIRSTB).

The ratios depicting the CAMEL parameters were calculated based on the publicly available
information published at Reserve Bank of India, Indian Bankers’ Association and
Moneycontrol.com. The CAMEL parameters are discussed in the following section.

Capital Adequacy Ratio: Capital adequacy ratios ("CAR") are a measure of the
amount of a bank's core capital expressed as a percentage of its risk-weighted asset.

CAR = (Tier 1 Capital + Tier 2 Capital) / Risk weighted Assets

TIER 1 CAPITAL - (paid up capital + statutory reserves + disclosed free reserves) - (equity
investments in subsidiary + intangible assets + current and b/f losses)

TIER 2 CAPITAL – i. Undisclosed Reserves, ii. General Loss reserves, iii. hybrid debt
capital instruments and subordinated debts where risk can either be weighted assets (a) or
the respective national regulator's minimum total capital requirement. If using risk-weighted
assets,

CAR = [ (T1 + T2) / a] ≥ 10%

Asset Quality: To account for the extent of Non-Performing Asset in the portfolios of the
banks and the extent of damage this particular asset class can have on the financial
performance the following ratio is considered for the purpose of analysis.

Net NPA to Net Advances: The ratio portrays the quality of the asset class in the portfolio
and the also the extent of deterioration of the quality of the asset portfolio. This dimension of
CAMEL analysis conveys the portfolio risk the bank is subjected to and the effects it could
have in the overall performance of the bank.

Management Quality: The management dimension in CAMEL analysis has assumed

much important position like never before.

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To capture the possible dynamics of management efficiency affecting the financial
performance of the banks the following ratios are considered. i. Market Value to Equity
Capital, ii. Total Advances to Total Deposits. iii. Business Per Employee, iv. Profit Per
Employee

Earnings Quality: Banks depend on their strong capability of earnings for performing
the activities like funding dividends, maintaining adequate capital levels, providing for
opportunities of investment for bank to grow, strategies for engaging in new activities and
maintaining the competitive outlook.

However apart from the sources of earning, the following dimensions also decide
significantly the financial performance of the banks. i. Level, trend, and stability of earnings,
ii. Quality and sources of earnings. iii. Ability to augment capital through retained earnings.
iv. Exposure to market risks. v. Provisions for loan losses. Keeping in purview the above-
mentioned dynamics the following ratios in the dimension of earning ability of the banks to
measure financial performance are considered. i. Operating profit by Average working
funds, ii. Net profit to average assets, iii. Interest income to total income, iv. Non-Interest
income to total income.

Liquidity: Liquidity management in banks has assumed prime importance due to

competitive pressure and the easy flow of foreign capital in the domestic markets. The
impact of liquidity crisis in the banks can adversely impact the financial performance of the
banks. Inability of the banks to manage its short-term liquidity liabilities and loan
commitments can adversely impact the performance of the banks by substantially increasing
its cost of fund and over exposure to unrated asset category. Also, the cash flow from
principal and interest payments could vary due to the types of loans on the balance sheet
impacting the liquidity position.

To capture the impact of liquidity on the financial performance of the banks two ratios are
considered. i. Liquid assets to total assets. ii. Liquid asset to total deposit. Based on the
values of the ratios the selected banks will be ranked. Higher average value of the ratios
gets ranked higher. The best ratio gets rank one followed up to rank twelve with an interval
of one. In case of tie the average rank is assigned to the banks. All the ratios having higher
value get higher rank whereas the ratio Net NPA to Total Asset gets the rank in reverse
order. Higher Net NPA to Total Asset ratio attracts lower rank as well.

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 Indus
Axis Federal HDFC ICICI IDFC Kotak RBL Yes
Banks SBI BoB PNB Ind
Bank Bank Bank bank Bank Bank Bank Bank
Bank

Capital Adequacy
8 12 11 6 3 3 5 6 2 1 9 9
Parameter
Asset Quality
10 11 12 7 6 1 9 8 2 5 4 3
Parameter
Management
6 7 9 3 11 4 5 1 8 10 11 2
Quality Parameter
Earnings Quality
10 11 12 7 2 1 7 5 6 4 9 3
Parameter
Liquidity
6 1 4 12 11 10 7 1 9 5 3 7
Parameter

Average 8 8.4 9.6 7 6.6 3.8 6.6 4.2 5.4 5 7.2 4.8

Rank 10 11 12 8 6 1 6 2 5 4 9 3

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To go further with the CAMEL Approach, we constructed the Banking Stability Index (BSI) using
the Ratios used for CAMEL Approach. For calculation, we first normalised the values for a year
and for all banks and then, we calculated a sum of these values for each Individual Ratios.
Finally, we calculated the simple weighted average of the sum for each ratio, to find the index for
each year. The Index was then plotted and it was found it be similar to that in the FSR, further
verifying our Calculation.

The normalisation was done using: -

(X – Min (X)) / (Max (X) – Min (X)) X: - The value of Ratio in that year.

The Simple weighted average: -

1/n × X1 + 1/n × X2 +........+ 1/n × XN X: - The sum of Ratio for all banks in that year.

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Results and Discussion:

The analysis derived a conclusion that the results are in sync with those of the stress tests
performed and public sector banks straightaway lag behind private ones in the grand
ranking. This bring out a concern and a discussion in itself about the common owner of
these banks. The ranking of the twelve banks under different criteria of the CAMEL analysis
indicates that the private sector banks have performed relatively better in terms of almost
all ratios as compared to their public sector counterparts from 2013-2018. PVB’s have
better earnings, good management, better capital Adequacy and also a better asset quality.
Also, a point worth highlighting is that the ratios dealing with profit and asset management
by employees seems to erode which narrows down to the idea of employee incentivization
and appraisals.

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Financial Sector: Regulation and Developments

Domestic Regulations & Developments:

As pointed out in FSR, the complete IL&FS incident brings light upon the regulatory
requirements and the increasing risk of regulatory arbitrage. The problems related to
Financial Conglomerate structures and their oversight cannot be overlooked in the long run
as the product (Insurance, Pension or Mutual Funds) market continues to deepen. In this
context, one immediately relevant characteristic of the Indian financial system’s regulatory
architecture is its complexity – both in terms of the sheer number of regulatory, quasi-
regulatory, non-regulatory-but-still-regulating bodies (central government ministries and
state governments), and also because of their overlapping, ambiguously defined respective
spheres of concern and influence. An important implication of this architecture is the
regulatory arbitrage emerging from it, because there are spaces in the financial system that
are either regulated by multiple entities with little clarity on division of responsibilities, or are
regulated by agencies that do not have the competence to regulate them effectively e.g.
regulation of district cooperative banks. This architecture also creates problems of
coordination among agencies. For managing systemic risks, regulatory coordination at the
level of financial system is crucial. In India’s financial system, unless the FSDC plays an
active role, the inter-agency coordination mechanisms are quite weak.

Coming down to the Insurance markets, a clear growth in the sector proposes India as a
potential market for the future due to several reasons as stated in the FSR. The potential of
the market has indeed started attracting FDI. Insurance sector has the capability to raise
long term capital from the public as it is the only market in which people invest their money
for a long period of time, say 30 years. An increase in FDI in insurance sector would
indirectly be a boom for the Indian Economy. On the other hand, Pension funds have not
only contributed to financial inclusion by initiating a habit of savings among the unorganized
sector and low-income groups but also contributed to assets under management.

Other developments, market practices and supervisory concerns:

This section opens up with the meeting of FSDC under the chairmanship of Finance
Minister at October, where they discussed key topics like Crypto-Assets, CERT-Fin,
RegTech, SupTech, Cyber-Security, the proposals of Sumit Bose Committee and Macro-
economic issues like Real Interest Rates, Liquidity etc. Mutual Fund Industry is
experiencing volatility and to resolve these issues, SEBI has put in place various policy
tools like Exit Load, Better Asset-Liability Match, Portfolio diversification norms, 20-25 rule
etc. SEBI has been increasing its focus on Commodity derivatives, since it took charge of

15
its regulation on September 28, 2015. It had developed better Risk Management and
Surveillance of Commodity Derivative Markets and also helped in developments of
Commodity Markets over the past few years. With the proposal of Union Budget (17-18),
about the unification of Stock Exchanges, SEBI is ready to implement it in two phases, first
at intermediary level and then complete integration of exchanges. This step can be viewed
as a move to help in expanding the commodity markets further with more efficient markets,
lesser transactions costs and better functioning of securities as well as commodities
markets.

From EBA (European Banking Authority) report, major FinTech use-cases like Biometric
Authentication, Robo-Advisory, Big Data and Machine learning in Credit Scoring, Use of
DLT and Smart Contracts for Trade Finance, NFC for Mobile payments, Distributed Ledger
Technology for Customer Verification and Outsourcing the Core Banking System to the
public Cloud has been discussed, signaling both Opportunities and Challenges. The Indian
Banking Sector has been facing challenges in adopting the FinTech landscape and the
possible solutions may be banks, encouraged to collaborate with FinTech/start-ups to
improve their customer experience, cost reduction and operational excellence to undertake
FinTech activity in areas like payment, data analytics and risk management areas.

With the rising focus on Supervision and Regulations, the technological advancements are
the needs of the hour in these sectors, and SupTech and RegTech promise to be game-
changer in the reporting and regulatory process. SupTech aims to provide Real-Time
monitoring, Detecting Anti-Money Laundering (AML), Market surveillance and Supervision,
Identification of Macro-financial Risks using Data Analytics and Supervised Machine
Learning. The challenge for the Indian regulators is to balance efficiency with prudential
measures to mitigate risks to be able to harness the opportunities offered by FinTech. With
greater digital penetration, the major area of concern for the Indian Financial Sector has
been the Cyber Threats and RBI labels cyber-attacks as a high-risk zone for Indian
Banking Sector. Banks have been outlined a comprehensive Cyber Security framework
with periodic drills being conducted by CERT-In (Indian Computer Emergency Response
Team) and IDRBT (The Institute for Development & Research in Banking Technology) for
Cyber-threat-resilient banking System. So, banks are advised to undertake extensive
surveillance of their systems and networks on a real-time basis with the help of
advancements in technologies.

RBI recommends Risk Culture to rein in Bank Frauds and the report highlights the spurt in
the incidence of frauds, with Public sector banks (PSBs) continue to lead the pack and loan
related frauds to dominate the scene. The number shows that 5,917 frauds involving an
amount of ₹ 41,167 crores were reported by the banks in the fiscal year 2017-18, as
against 4,306 frauds entailing an amount of ₹ 10,170 crores in FY14 i.e. four-fold jump in

16
the quantum of money defrauded in last 4 years. It has been shown that the poor risk
management and inadequacy of audit functions are two major factors responsible for the
situation. The banks need to stop financial frauds that happen due to weakness in the
linking between the domestic banking software and the Society for Worldwide Interbank
Financial Telecommunication messaging system (SWIFT) by real-time monitoring and
catching inconsistencies. The major step of RBI to issue directives on storage of payment
system data in India is aimed to boost the growth of digital payments sector with better
monitoring of supervisory data and better Consumer Data Protection.

With a significant rise in corporate NPAs over the last 5-6 years, there is a need for an
efficient Credit infrastructure at an aggregate level, which addresses the drawbacks of
traditional Retail credit Scoring. Addressing these, with the aim of increasing financial
inclusion, improving ease of doing business, setting up a digital Public Credit Registry
(PCR) has been initiated by RBI which will enable Banks, financial institutions and even
new FinTech lenders to get a real-time profile of existing as well as prospective borrowers.
The PCR aims to be an extensive database of credit information for all credit products in
the country, from point of origination of credit to its termination (repayments, restructuring,
default, resolution, etc.), eventually covering all lender-borrower accounts without a size
threshold. The PCR will also include data from entities like SEBI, the corporate affairs
ministry, Goods and Service Tax Network (GSTN) and the Insolvency and Bankruptcy
Board of India (IBBI) to capture aggregate details of all borrowers and solve the major
problem of “Information Asymmetry”. Further integration of PCR with GSTN along with
advancements, would improve information access and quality. With credit data easily
available to various Financial Institutions, PCR will make easier and faster capital access to
individuals to corporates, particularly loan-stricken MSME sector with better credit
information and hence, significantly reduce rising bad-loans. Thus, PCR would prove as
one of the giant strides to democratize and formalize credit in India and can have a huge
impact in creating financial healthy India.

17
Conclusion:
The paper based on the Financial Stability Report of RBI has brought forward how several
crucial factors like Fed rate hikes, volatile oil prices, normalization of advanced economies’
monetary policy, a general fall in global demand and the quantitative easing program
carried out by some economies like Japan have impacted various indices, returns of
financial instruments and macroeconomic indicators. The soundness and resilience of
financial institutions has been tested against macroeconomic shocks via stress test with
ratios such as CRAR and GNPA. It has come to the fore that a 2 SD shock on GNPA ratio
will bring about the CRAR ratio of 18 banks mostly PSB's below 9 per cent, while the
private banks experience less than 3.1 per cent shift in CRAR ratio making PSB's more
vulnerable to macroeconomic shocks.

The focus shifts to the CAMEL approach and using data and ratios required for verifying
the results of the stress tests and highlighting the fact how among the selected banks
Private Sector Banks showcase better soundness as compared to that of Public Sector
Banks.

Analysis of MSMEs portrays that performance of PSBs in the MSME segment trails that of
private banks and non-banking financial companies (NBFCs). It also has focused on
targeted monitoring of segmental (MSME) performance, with regards to growth rate as well
as quality, given the importance of the health of PSBs.

The joint solvency-liquidity contagion analysis shows that the losses due to the default of a
bank have declined. Based on the analysis of the financial network structure for the period
September 2017 - September 2018, the RBI report showed a shrinking inter-bank market
and increasing bank linkages with asset management companies-mutual funds (AMC-MFs)
for raising funds and with NBFCs for lending. In the insurance sector, a clear growth
proposes India as a potential market for attracting more FDI inflows. International and
domestic developments include several new regimes and policy measures taken by
institutions in India and abroad have increased the systemic resilience of the financial
sector globally.

With the rising focus on Supervision and Regulations in the banking sector, the
technological advancements are the needs of the hour in these sectors, and SupTech and
RegTech promise to be game-changer in the reporting and regulatory process. With a
significant rise in corporate NPAs over the last 5-6 years, there is a need for an efficient
Credit infrastructure at an aggregate level, which addresses the drawbacks of traditional
Retail credit Scoring. PCR initiated by RBI will make easier and faster capital access to
individuals to corporates, particularly loan-stricken MSME sector with better credit
information and hence, significantly reduce rising bad-loans. The PCR aims to be an
extensive database of credit information for all credit products in the country.

18
 Appendix
Calculation of Individual Parameters

Bank Indus
of Axis Federal Ind Kotak Yes
SBI Baroda PNB Bank Bank HDFC ICICI IDFC Bank Bank RBL Bank

CRAR-Ranking 11 10 12 8 4 6 3 1 5 2 7 9

2017-2018 10.36 10.46 7.12 13.04 14.18 13.25 15.92 17.68 14.58 17.56 13.61 13.2

2016-2017 10.35 9.93 8.91 11.87 11.81 12.79 14.36 18.54 14.72 15.9 11.39 13.3

2015-2016 9.92 10.79 8.41 12.51 13.36 13.22 13.09 21.5 14.92 15.28 11.1 10.7

2014-2015 9.6 9.87 9.3 12.07 14.81 13.66 12.78 11.22 16.18 12.74 11.5

2013-2014 9.72 9.28 8.87 12.62 14.59 11.77 12.78 12.71 17.77 14.33 9.8

12.42 12.93 13.78 16.53 12.63

Average 9.99 10.066 8.522 2 13.75 8 6 19.24 13.63 8 4 11.7
Advances to total
assets ratio-Ranking 6 10 7 5 4 2 8 12 1 3 11 9
2017-2018 0.56 0.59 0.57 0.64 0.66 0.62 0.58 0.41 0.65 0.64 0.65 0.65

2016-2017 0.58 0.55 0.58 0.62 0.64 0.64 0.60 0.44 0.63 0.63 0.61 0.62

2015-2016 0.62 0.57 0.62 0.63 0.61 0.63 0.60 0.55 0.62 0.62 0.54 0.59

2014-2015 0.63 0.60 0.63 0.61 0.62 0.62 0.60 0.62 0.62 0.53 0.55

2013-2014 0.67 0.60 0.63 0.60 0.58 0.62 0.57 0.63 0.61 0.54 0.51

Average 0.61 0.58 0.61 0.62 0.62 0.62 0.59 0.47 0.63 0.62 0.57 0.59
Net NPA to Net
Advances-Ranking 10 11 12 7 6 1 9 8 2 5 4 3

2017-2018 5.73 5.49 11.24 3.64 1.69 0.4 5.43 1.69 0.51 0.98 0.78 0.64

2016-2017 3.71 4.72 7.81 2.27 1.28 0.33 5.43 1.14 0.39 1.26 0.64 0.81

2015-2016 3.81 5.06 8.61 0.74 1.64 0.28 2.98 2.39 0.36 1.06 0.59 0.29

2014-2015 2.12 1.89 4.06 0.46 0.73 0.25 1.61 0.31 0.92 0.27 0.12

2013-2014 2.57 1.52 2.85 0.44 0.74 0.27 0.97 0.33 1.08 0.31 0.05

Average 3.588 3.736 6.914 1.51 1.216 0.306 3.284 1.74 0.38 1.06 0.518 0.382

19
Market Value to
Equity Capital 1 4 3 5 9 2 6 12 10 8 11 7
3,519.5 1,264.2 1,269. 1,357. 344.60 2,500. 692.0 34.83 477.7 428.95 168.2 742.0
2017-2018 0 1 02 65 97 6 3 0 3
3,094.6 1,401.0 1,646. 1,265. 332.49 2,047. 658.7 31.65 377.1 360.23 155.0 537.2
2016-2017 3 1 27 32 51 0 3 2 4
2,673.0 1,341.3 1,704. 1,134. 248.50 1,661. 607.3 20.81 282.7 302.70 413.6
2015-2016 7 5 33 69 66 5 0 7
2,498.6 1,497.7 1,625. 1,086. 472.39 1,445. 596.1 259.5 477.76 350.1
2014-2015 2 7 62 74 99 0 9 4
3,917.5 1,430.3 1,517. 814.7 411.39 1,169. 527.0 184.9 334.80 293.5
2013-2014 6 9 95 7 39 2 8 9
3,140.6 1,386.9 1,552. 1,131. 1,765. 616.2 316.4 161.6 467.3
Average 8 5 64 84 361.87 10 5 29.10 3 380.89 1 3
Total Advances to
Total Deposits 9 12 11 4 10 8 2 1 3 6 7 5
108.2 101.3
2017-2018 71.49 72.28 67.54 96.92 82.11 83.46 91.34 3 95.59 88.1 91.72 9
122.8
2016-2017 76.83 63.7 67.47 90.03 75.09 86.16 94.73 6 89.34 86.44 85.14 92.57
103.2 556.0
2015-2016 84.57 66.85 74.55 94.64 73.37 85.02 8 2 95.07 85.59 87.19 87.91
107.1
2014-2015 82.45 69.32 75.9 87.17 72.41 81.08 8 92.79 88.38 84.51 82.86
102.0
2013-2014 86.76 69.79 77.38 81.89 72.72 82.49 5 91.07 89.77 84.8 74.99
72.56 83.64 99.71 262.3 92.77 86.67 87.94
Average 80.42 68.388 8 90.13 75.14 2 6 7 2 87.656 2 4
Business per
Employee-Ranking 4 2 6 5 7 8 10 1 11 12 9 3
115.4 213.0
2017-2018 167 176.6 147.4 148.4 170.9 150.8 107.8 189.4 4 90.4 150.6 2
159.5
2016-2017 162.4 174.9 141.7 140 144.9 123.6 98.9 213.2 91.63 83.5 121.6 5
173.2
2015-2016 141.1 168 135.9 148.4 120.3 113.9 94.3 287.8 76.46 75.1 109.5 9

2014-2015 123.4 188.9 131.9 137.1 111.5 101 83.2 71.92 70.5 82.3 168.6

2013-2014 106.38 186.5 128.3 123 99.7 89 74.7 71.71 67.8 69.7 155.8
Average 140.05 178.98 137.0 139.3 129.46 115.6 91.78 230.1 85.43 77.46 106.7 174.0

20
Profit per Employee 10 11 12 5 9 3 4 1 6 7 8
2017-2018 -0.24 -0.4 -1.7 0.05 0.7 2 0.8 1.8 1.43 1.2 1.2 2.3

2016-2017 0.51 0.3 0.2 0.67 0.7 1.6 1.2 3.2 1.13 1.1 0.9 2

2015-2016 0.47 -1 -0.6 1.8 0.4 1.5 1.4 2.2 0.99 0.7 0.8 2.1

2014-2015 0.6 0.7 0.5 1.7 0.9 1 1.6 0.94 1.1 0.6 2.1

2013-2014 0.49 1 0.5 1.5 0.8 1.2 1.4 0.16 0.42 0.01 0.88

Average 0.366 0.12 -0.22 1.144 0.7 1.46 1.28 2.4 0.93 0.904 0.702 1.876
Operating Profit by
Avg working Funds 11 10 12 9 4 1 7 2 6 3 8 5
2017-2018 -1.48 -1.26 -2.76 -1.54 -0.2 0.21 -1.21 -0.2 -0.51 0.01 -0.7 -0.31

2016-2017 -0.92 -0.77 -2.76 -1.33 -0.21 0.26 -1.25 0 -0.72 -0.03 -0.63 -0.38

2015-2016 -0.75 -1.54 -1.05 -0.21 -0.33 0.21 -0.77 0.08 -0.72 -0.27 -0.5 -0.1

2014-2015 -0.46 -0.14 -1.62 -0.21 0.15 0.2 -0.15 -0.55 -0.15 -0.72 -0.03

2013-2014 -0.42 0.01 -0.46 -0.3 0.19 0.11 0.1 -0.55 0.11 -0.92 -0.09

- - - -
Average -0.806 -0.74 -1.73 0.718 -0.08 0.198 0.656 -0.04 -0.61 -0.066 0.694 0.182
Net Profit to average
assets-Ranking 10 11 12 6 9 1 5 8 2 4 7 3
2017-2018 -0.19 -0.34 -1.6 0.04 0.75 1.93 0.87 0.72 1.9 1.73 1.22 1.78

2016-2017 0.41 0.2 0.19 0.65 0.84 1.88 1.35 1.04 1.86 1.73 1.08 1.81

2015-2016 0.46 -0.78 -0.61 1.72 0.57 1.89 1.49 1.1 1.91 1.19 0.99 1.78

2014-2015 0.68 0.49 0.53 1.83 1.32 2.02 1.86 1.9 1.98 1.02 1.71

2013-2014 0.65 0.75 0.64 1.78 1.2 2 1.78 1.81 1.8 0.67 1.61

Average 0.402 0.064 -0.17 1.204 0.936 1.944 1.47 0.953 1.876 1.686 0.996 1.738
Interest Income to
total income 5 3 4 10 1 6 12 2 11 7 8 9
2017-2018 0.832 0.868 0.844 0.807 0.894 0.841 0.759 0.889 0.784 0.83 0.808 0.795

2016-2017 0.832 0.862 0.841 0.792 0.889 0.849 0.735 0.894 0.775 0.836 0.831 0.798

2015-2016 0.855 0.898 0.888 0.814 0.906 0.849 0.775 0.9 0.783 0.862 0.848 0.833

2014-2015 0.871 0.907 0.887 0.809 0.894 0.843 0.801 0.792 0.827 0.829 0.85

2013-2014 0.88 0.897 0.904 0.805 0.909 0.839 0.809 0.814 0.862 0.838 0.853

0.872 0.805 0.844 0.775 0.894 0.789 0.843 0.830 0.825

Average 0.854 0.8864 8 4 0.8984 2 8 3333 6 4 8 8

21
Liquid asset to total
Assets-Ranking 5 1 2 12 8 7 11 3 9 6 4 10
0.331 0.215 0.293 0.259 0.348 0.243 0.274 0.254 0.236
2017-2018 0.3072 0.333 6 6 0.2449 1 4 3 1 1 2 9
0.335 0.240 0.244 0.247 0.271 0.281 0.277 0.289 0.257
2016-2017 0.2814 0.3833 3 4 0.2543 8 4 4 2 1 8 1
0.309 0.242 0.265 0.242 0.297 0.267 0.272 0.325
2015-2016 0.2718 0.3557 9 9 0.2698 5 4 3 8 1 6 0.263
0.304 0.257 0.265 0.235 0.256 0.280 0.359 0.276
2014-2015 0.2649 0.3476 4 8 0.2633 6 3 9 6 7 3

0.291 0.256 0.273 0.235 0.255 0.268 0.285 0.260

2013-2014 0.2496 0.3478 5 9 0.2752 3 1 1 2 4 6

0.305
0.2749 0.3534 0.314 0.242 0.268 0.243 6666 0.260 0.274 0.302 0.258
Average 8 8 54 72 0.2615 46 92 667 82 42 94 78
Non-Interest Income
to Total Income-
Ranking 8 10 9 3 12 7 1 11 2 6 5 4

2017-2018 0.168 0.132 0.156 0.193 0.106 0.159 0.241 0.111 0.216 0.17 0.192 0.205

2016-2017 0.168 0.138 0.159 0.208 0.111 0.151 0.265 0.106 0.225 0.164 0.169 0.202

2015-2016 0.145 0.102 0.112 0.186 0.094 0.151 0.225 0.1 0.217 0.138 0.152 0.167

2014-2015 0.129 0.093 0.113 0.191 0.106 0.157 0.199 0.208 0.173 0.171 0.15

2013-2014 0.12 0.103 0.096 0.195 0.091 0.161 0.191 0.186 0.138 0.162 0.147

0.105
0.127 0.194 0.155 0.224 6666 0.210 0.156 0.169 0.174
Average 0.146 0.1136 2 6 0.1016 8 2 667 4 6 2 2
Liquid Assets to
Total Deposits-
Ranking 9 3 8 11 12 10 4 1 7 6 2 5

2017-2018 0.392 0.405 0.395 0.329 0.303 0.395 0.407 0.914 0.355 0.377 0.358 0.369

2016-2017 0.372 0.443 0.389 0.349 0.299 0.329 0.39 0.757 0.397 0.378 0.408 0.387

2015-2016 0.37 0.416 0.374 0.366 0.322 0.36 0.414 3.01 0.411 0.377 0.524 0.389

2014-2015 0.344 0.402 0.366 0.369 0.308 0.348 0.42 0.387 0.397 0.57 0.413

2013-2014 0.321 0.403 0.355 0.35 0.344 0.366 0.421 0.367 0.398 0.448 0.383

1.560
0.375 0.352 0.359 0.410 3333 0.383 0.385 0.461 0.388
Average 0.3598 0.4138 8 6 0.3152 6 4 33 4 4 6 2

22
 Group Parameter Ranking
Capital Adequacy Parameter-Group Ranking
Bank
of Axis Federal IndusInd Kotak Yes
SBI Baroda PNB Bank Bank HDFC ICICI IDFC bank Bank RBL Bank
Capital Adequacy
Parameter 11 10 12 8 4 6 3 1 5 2 7 9
Advances to Total
Assets Ratio 6 10 7 5 4 2 8 12 1 3 11 9

Average 8.5 10 9.5 6.5 4 4 5.5 6.5 3 2.5 9 9

Rank 8 12 11 6 3 3 5 6 2 1 9 9

Asset Quality Parameter - Group Ranking

Bank Indusi
of Axis Federa nd Yes
SBI Baroda PNB Bank l Bank HDFC ICICI IDFC bank Kotak RBL Bank
Net NPA to Net
Advances % 10 11 12 7 6 1 9 8 2 5 4 3

Management Quality Parameter- Group Ranking

Feder Indus
Bank of Axis al ind Yes
SBI Baroda PNB Bank Bank HDFC ICICI IDFC bank Kotak RBL Bank
Market Value to
Equity Capital 1 4 3 5 9 2 6 12 10 8 11 7
Total Advances to
Total Deposits 9 12 11 4 10 8 2 1 3 6 7 5
Business Per
Employee 4 2 6 5 7 8 10 1 11 12 9 3
Profit Per
Employee 10 11 12 5 9 3 4 1 6 7 8 2

Average 6 7.25 8 4.75 8.75 5.25 5.5 3.75 7.5 8.25 8.75 4.25

Rank 6 7 9 3 11 4 5 1 8 10 11 2

23
 Earnings Quality Parameter- Group Ranking

Bank Indus
of Axis Federal Ind Yes
SBI Baroda PNB Bank Bank HDFC ICICI IDFC bank Kotak RBL Bank
Operating Profit by
Average working
Funds 11 10 12 9 4 1 7 2 6 3 8 5
Net profit to average
assets 10 11 12 6 9 1 5 8 2 4 7 3
Interest income to
total income 5 3 4 10 1 6 12 2 11 7 8 9
Non-Interest income
to total income 7 11 9 1 2 3 5 11 4 8 10 5

Average 8.25 8.75 9.25 6.5 4 2.75 7.25 5.75 5.75 5.5 8.25 5.5

Rank 9 11 12 7 2 1 8 5 5 3 9 3

Liquidity Parameter- Group Ranking

Feder Indus
Bank of Axis -al Ind Yes
SBI Baroda PNB Bank Bank HDFC ICICI IDFC bank Kotak RBL Bank
Liquid Assets to
Total Assets 5 1 2 12 8 7 11 3 9 6 4 10
Liquid Assets to
Total deposits 9 3 8 11 12 10 4 1 7 6 2 5

Average 7 2 5 11.5 10 8.5 7.5 2 8 6 3 7.5

Rank 6 1 4 12 11 10 7 1 9 5 3 7

24