New watchlist

The RBI in its latest Financial Stability Report, has cautioned about the emerging risks in the markets. In particular, the RBI highlights three risks to be watched carefully by the investors – (i) financial sector asset quality, especially for the private banks and small banks; (ii) valuation risk in the equities; and (iii) financial risks emanating from stablecoins and private credit.

Credit Quality is good, but needs to be watched

One of the clearest messages from the RBI’s latest Financial Stability Report is this: India’s banking system is in good shape, but some areas of concerns have emerged.

Banks today are better capitalized, more profitable and far cleaner than they were a decade ago. Capital adequacy ratios are well above regulatory requirements; liquidity buffers are comfortable and gross NPAs continue to trend down. Even under RBI’s worst-case stress scenarios, banks remain resilient.

For investors, this is a big positive. Strong banks mean smoother credit flow, better transmission of monetary policy and lower risk of sudden financial shocks.

But this is not a “no-risk” story.

The RBI flags specific pockets of concern—especially unsecured retail lending and microfinance. Some private banks have seen higher slippages and write-offs in unsecured personal loans. While this is not system-threatening yet, it is an area to monitor closely if economic conditions tighten.

On the NBFC side, balance sheets look stable and asset quality is improving. However, NBFC-MFIs face rising credit costs, and fintech-led unsecured lending is growing rapidly. Regulation and underwriting discipline will matter a lot going forward.​

​


Banks and large NBFCs remain long-term structural winners. However, investors should prefer institutions with strong deposit franchises, conservative underwriting and diversified loan books. Avoid chasing growth at the cost of asset quality.

Lower volatility may be deceptive

If you only look at market volatility, everything seems fine. But the RBI tells a different story beneath the surface.

Equity valuations—globally and in India—are at the higher end of historical ranges. A small set of AI-linked stocks has driven a disproportionate share of global returns. This concentration makes markets vulnerable to sharp corrections if expectations change.

India has handled global shocks well so far, thanks to strong domestic investor flows and resilient earnings. SIP inflows into mutual funds continue to act as a stabiliser. But earnings forecasts have softened, and equity risk premiums are rising.

Bond markets are also adjusting. Government borrowing remains high, yield curves have steepened, and long-term bond demand from banks and insurers has moderated.

This is not a time for blind risk-taking. Quality matters more than momentum. Valuation discipline, earnings visibility and balance-sheet strength should drive investment decisions. Expect higher volatility, even if it hasn’t shown up yet.

Stablecoins, private credit & interconnected risks

One of the most important—and less discussed—parts of the FSR is its focus on new-age financial risks.

Stablecoins are growing fast and are now deeply linked to traditional financial markets, especially US Treasury markets. During stress events, stablecoin runs could amplify global liquidity shocks. While India’s direct exposure is limited, spillovers are real.

Private credit is another area of concern. Globally, opaque lending structures, leverage and interconnected financing raise the risk of hidden losses. Indian banks are increasing exposure to private credit vehicles, which needs careful monitoring.

Finally, financial interlinkages are growing. Banks, NBFCs, mutual funds and insurers are more connected than ever. This improves efficiency—but also means stress can spread faster.

Innovation is positive, but complexity increases risk. Investors should be cautious with businesses dependent on opaque funding, excessive leverage or regulatory arbitrage. Transparency and governance will be key differentiators.

Bottomline for investors

India’s financial system is strong, but this is a phase for selectivity, patience and risk awareness—not complacency.

 

Comments

Post a Comment

Popular posts from this blog

Financial Inclusion - A potent tool for sustainable growth - Part 2

Image
The following are the key highlights of the approach paper issued by RBI on National Strategy for Financial Inclusion 2019-2014. Introduction Financial inclusion is increasingly being recognized as a key driver of economic growth and poverty alleviation the world over. Access to formal finance can boost job creation, reduce vulnerability to economic shocks and increase investments in human capital. There has been a growing evidence on how financial inclusion has a multiplier effect in boosting overall economic output, reducing poverty and income inequality at the national level. Financial inclusion of women is particularly important for gender equality and women’s economic empowerment. Definition In Indian context the financial inclusion has been defined as “the process of ensuring access to financial services, timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost”. Vision ...
Read more

Thoughts on FY20 GDP advance estimates - 2

Image
As I indicated yesterday (see here), the advance estimates of FY20 GDP are at significant variance from the estimates used for the setting budget targets in July. The union budget for FY20 presented in July 2019 has apparently estimated nominal GDP growth at 12.2% for the purposes of calculating deficit and revenue. A 40% lower nominal GDP growth could distort the entire fiscal maths of the government. For example, consider the following: The union budget estimated the central fiscal deficit for FY20 to be Rs7.04trn or 3.3% of the GDP. This implies a nominal GDP of Rs213.26trn. As per the revised estimates, the nominal GDP for FY20 may be Rs204.42trn only. As per the latest reports ( see here ) the actual fiscal deficit of the central government was already at Rs7.53trn (or 3.7% of the advance estimates of GDP) by the end of November 2019. This implies any one or more of the following three scenarios materializing: (i)     The governm...
Read more

Find me a new grocery shop

Many years ago Mr. Kishore Biyani started the business of organized retail of readymade garments. Few years later he expanded his offering to groceries, electronics, furniture, ethnic crafts etc. He grew fast through organic and inorganic methods. He brilliantly assessed the markets and conceived the business formats to suit those markets. Established good quality stores across the country and gave organized retail a strong foothold in the country, before the likes of Tata, Birla, Goenka, Damani and Ambani entered in the fray. However, business of Mr. Biyani always remained in stress. Lot of hopes were raised when he reorganized his business post global financial crisis by selling his flagship Pantaloon format to Birla and rechristened his business group as Future Group. However, as I understand, inventory and financial mismanagement always kept the group under stress. For some years it was very clear that Mr. Biyani will have to materially dilute his stake in the group to mitigate...
Read more