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RBI has fined Bajaj Fin for not reining in recovery agents (Mint)
RBI has fined Bajaj Fin for not reining in recovery agents (Mint)

Stability in focus

Another major cause for concern arises from asset values being inflated by all the extra liquidity sent sloshing around the world by central banks in their effort to stimulate economic activity

While the covid crisis is widely expected to leave our economy scarred in various ways, one big question is whether it would also leave us with worse risks of overall instability. The Reserve Bank of India’s latest financial stability report offers an assessment. Loans going bad are one point of worry. While gross bad loans as a proportion of total loans are seen as benign for now, the pandemic’s effect is projected to show up with a lag. In a severe scenario, this ratio could spike to a 25-year high of 14.8% by this September. Even a baseline case puts this figure at 13.5%, with state-run banks watching their asset quality fall more than private lenders.

Another major cause for concern arises from asset values being inflated by all the extra liquidity sent sloshing around the world by central banks in their effort to stimulate economic activity. Indian asset markets have seen huge inflows from abroad and equity prices in particular may have already run ahead of levels that we can justify on the basis of expected corporate earnings. This poses a risk not just of a sudden reversal of capital flows, but also of money ending up where it should not and distorting India’s growth.

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