The Reserve Bank Of India released its annual report for FY 19-20 on 25th August. In this report, the apex bank outlined concerns regarding the Indian economy. RBI projected India's growth at -4.5% for the year 2020. The report stated that the slowdown in the Indian economy will lead to deepening in structural problems and thus there is an urge for urgent reforms. The report is published annually by RBI which analyses the working and operations of RBI and suggests measures to improve the economy. In the annual report, the Central Bank makes it clear that as of June 30, 2019, “it stands as the Central Bank with one of the highest levels of financial resilience globally”. The report is submitted to the Central Government in terms of section 53(2) of Reserve Bank Of India Act, 1934.
Balance Sheet of RBI
The balance sheet of RBI plays a crucial role in the functioning of the country's economy largely reflecting the activities carried out in pursuance of its currency issue function as well as monetary policy and reserve many objectives. The RBI’s balance sheet increased by Rs.12,318.88 billion. It raised from Rs.41,029.5 billion as on June 30, 2019, to Rs.53,347.93 billion as on June 30, 2020 representing the growth by 30.2%. The gross total income of the year 2019-2020 declined by 29%. Its expenditure for the year 2019-20 is Rs. 925.40 billion as compared to 2018-19 where it was 170.45 billion.The overall surplus is of Rs. 57,128 billion.
On the liability side, the increase was due to the rise in notes issued. The increase on the asset side was due to an increase in domestic and foreign investments by 18.40% and 27.28% respectively. Domestic assets constituted 28.75% while Foreign assets constituted 71.25% of total assets as of June 2020.While income for the year 2018-19 increased by 146.59% to Rs.1.93 lakh crore in 2018-19, the expenditure decreased by 39.72 % to Rs.170.45 billion from Rs.282.77billion. The interest income grew by 44.62 % to Rs. 1,068.37 billion and other income rose to Rs.861.99 billion as on June 30, 2019. Further, The RBI holding of government securities grew by 57.19%.
(Amount in ₹ billion)
As per the annual RBI report for FY 19-20, bank frauds of Rs.100,000 and above have more than doubled in value to Rs.1.85 trillion in FY20. The top 50 credit-related funds constituted 76% of the total amount reported. Majority of these frauds are in loan portfolios of banks, both in terms of number and values. Public Sector Banks (PBs) accounted for 80% of Rs.1.85 trillion while the private banks accounted for 18%. Frauds in loans constituted .98%. The aggregate amount of money involved in frauds in April-June 2020 stood at Rs. 28,843 crores. The no. of fraud cases has also seen a steep rise, from 5,900 cases in 2018, it rose to 6800 in 2019. Weak implementation of Early Warning Signals (EWS)by banks, non-cooperation of borrowers during forensic audits, inconclusive audit reports and lack of decision making in joint lenders' meetings account for the delay in detection of frauds.
The Contingency Fund of RBI report reduced to Rs.1.96 lakh crore as of June 30, after Rs.52,000 crore excess payout to the government. It was Rs. 2.32 lakh crore in 2018-19. This has been the case because RBI has changed its way of calculating its reserves based of the recommendation made by Bimal Jalan Committee. The Contingency Fund is a fund of emergency. The fund has been established by the Government of India under article 267. In 2005, it was raised to Rs500 crore from Rs 50 crore.
Financial Health Of Banks
Deferment of interest payments, loan installments and restructuring may lead to the deterioration in the financial health of the banks unless they are closely monitored. The regulatory initiatives to provide loans and financial assistance were taken by RBI to cut back the economic impact of Covid-19 pandemic. According to the RBI, nearly 50 per cent of the customers, accounting for around half of outstanding bank loans, opted to avail the benefit of the relief measures, loan moratorium to tackle the lockdown impact.
This resulted in a bigspike in Non-Performing Assets (NPAs) until now. RBI in its July 2020 Financial Stability Reporthad warned that the NPAsof all Scheduled Commercial Banks (SCBs) may increase from 8.5% in March2020 to 12.5% by March 2021 and in lieu of this severe pandemic, the NPAs mayalso worsen to as high as 14.7%.
Indian banks need to shed high-risk aversionwhich is impeding credit growth to productive sectors. Banks have become extremely careful while giving fresh loans to borrowers due to the fear that loans could turn bad in future. Bank credit growth has slowed significantly in 2020 despite the RBI’sefforts to infuse a significant amount of liquidity into the banking system.Since March 2020, the RBI has infused around Rs. 8-9 lakh crore throughvarious schemes into the banking system.
Central Government Finances
The central government finances in the year 2019-20 overshoot its gross fiscal deficit target by 1.3% due to the amid economic slowdown. The central government reported a fiscal deficit of 3.3% but then it again revised its budget and stated 3.8%. the tax collection in 2019-20 fell to 7.7% while there was an increase of 13.4% in 2018. The RBI further stated that due to the increased expenditure requirement to fight COVID-19, the oath to return to the FRBM’s prescribed fiscal deficit target would be more challenging to attain.
State Government Finances
The consolidated fiscal deficit of 25 states fell to 2.8% of GDP. This was mainly due to the economic slowdown. RBI marked that the onset of COVID-19 pandemic will pose a major fiscal challenge to states’ budget. “Meeting the fiscal targets budgeted in 2020-21 has become even more challenging due to Covid-19, because of containment measures and fiscal interventions for providing health infrastructure, helping vulnerable sections of the society and sector-specific relief measures,” the report stated.
As per the report Tamil Nadu has topped market borrowing among states with the collection of Rs.30,500 crore in its fiscal year 2020-21, followed by Maharashtra which accounted for Rs.25,500 crore, and Rajasthan and Andhra Pradesh accounted for Rs. 17,000 crore respectively.
The general government fiscal deficit is likely to deteriorate to around 7.5% of the gross domestic product in 2019-20, as per provisional accounts, from 6.5% as per the revised estimates, the RBI said in its annual report for 2019-20.
The Currency notes of Rs 2000 denomination were not printed in 2019-20. The number of Rs. 2000 currency notes have come down from 33,632 lakh pieces in 2018 to 32,910 lakh in 2019 and further 27,398 lakh in 2020. The circulation of currency notes of Rs.500 and Rs.200 has risen, both in terms of volume and value from 2018. The share of Rs. 500 notes in the total value of currency has risen from 51% in 2018-19 to 60.8% in 2019-20.
The pandemic has greatly impacted the Indian Economy, it will take a longer time for India to regain its pre-COVID momentum, as the shock to consumption is severe. The private sector has been hit hard in the lieu of this pandemic, the consumption has significantly reduced, particularly in transport services, hospitality, recreation and cultural activities. Urban consumption demand, as well as Air services, has also seen a severe slowdown in their economy. RBI stated that the general consumer confidence got low due to the economic situation, inflation, unemployment and also because of the fear of the infection. The pandemic has also resulted in a certain amount of inequality as the white-collar employees can work from home, the labouring class and the essential workers have to work on-site and thus they are more prone to get infected. The areas of work which got largely suffered are hospitality, hotels, restaurants, tourism etc.
“Reviving consumption demand and private investment has assumed the highest priority in 2019-20. This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of fulfilling the vision of India becoming a $ 5 trillion economy by 2024-25,” the report stated.