Mumbai, Jun 28 (KNN) Reserve Bank of India (RBI) Governor Shaktikanta Das has underscored the critical role of governance in maintaining stability within the financial sector.

In a recent report, Das highlighted that robust governance practices are fundamental to the resilience of financial system stakeholders.

The latest Financial Stability Report, released on Thursday, raised several concerns about the current economic landscape. These include a decline in household savings, speculative activities in small-cap and derivatives markets, increased bank borrowing by Non-Banking Financial Companies (NBFCs), rising household debt, and potentially risky trading practices.

Household savings have dropped to 18.4 per cent of GDP in FY23, down from an average of 20 per cent over the 2013-22 period. The RBI stressed the importance of monitoring household debt due to the increasing trend in financial liabilities, which could impact overall financial stability.

The report also noted a rapid growth in futures and options trading volumes, posing risks to retail investors who may lack proper risk management strategies.

This could potentially affect the cash market. Additionally, short-duration options in volatile indices might amplify leverage, driven by changing investor preferences for immediate expiries.

Concerns were raised about the froth in small-cap stocks, with rapid increases in mid- and small-cap stock prices accompanied by higher inflows to mutual fund schemes targeting these segments.

Governor Das emphasised the need for all stakeholders to invest in technological advancements while ensuring the security and soundness of their systems.

He stressed the importance of developing an ecosystem that prioritises customer interests, stating that preserving customer trust is crucial for maintaining systemic stability.

Stress tests conducted by the RBI indicate that capital levels of banks and NBFCs will remain above regulatory minimums even under severe stress scenarios.

The banking sector is projected to maintain adequate capital, with a common equity tier-1 ratio of 10.8 per cent in FY25, even under a severe stress scenario where gross non-performing assets rise to 3.4 per cent.

The report projects an improvement in the banking system's health if economic indicators follow expectations.

Gross non-performing assets are expected to decrease further from a 12-year low of 2.8 per cent in March 2024 to 2.5 per cent by March 2025. However, the capital adequacy ratio could decline under medium and severe stress scenarios.

In the non-bank sector, high delinquency rates were observed among borrowers with personal loans below Rs 50,000.

(KNN Bureau)