More Bank Frauds, Dip in Contingency Fund: RBI Report Highlights

RBI’s contingency fund as a percentage of its total assets is at its lowest since 2000-01.

RBI released its annual report for FY19 on 29 August.

(Photo: Reuters)

The Reserve Bank of India (RBI) on Thursday, 29 August, released its annual report for the financial year 2018-19, flagging concerns over credit flow from non-banking financial companies (NBFCs) and lack of domestic demand.

The report also shows that following the highest-ever surplus transfer to the central government, RBI’s contingency fund has dipped to multi-year lows.

The central bank however has suggested that the slowdown in the economy is not a structural one.

Here are some of the key highlights from RBI’s annual report:

Contingency Fund at Lowest Since 2000-01

RBI’s contingency fund was one of the key numbers under the scanner in the central bank’s annual report after it transferred a record Rs 1.76 lakh crore as surplus to the government recently.

Consequently, the contingency fund has come down from Rs 2,321.08 crore in FY18 to Rs 1,963.44 crore in FY19. As a percentage of the total assets of RBI, it has dipped from 6.41 percent in the previous financial year to 4.78 percent this year, down 1.63 percentage points.

In fact, in terms of percentage of total assets, RBI’s contingency fund has never been lower than the current levels since the financial year 2000-01.

The contingency fund is a specific provision meant for meeting unexpected contingencies that arise from RBI's monetary policy and exchange rate operations.

Currency in Circulation Soars 17% to Rs 21.1 Lakh Cr in FY19

Despite the efforts to usher in a digital payment economy, the currency in circulation has jumped by a hefty 17 percent to Rs 21.10 lakh crore as of March 2019, the Reserve Bank said in its annual report.

The demand for the Rs 500 bill, which is the second highest denomination after the Rs 2,000 note, has soared the highest and now accounts for over 51 percent of the value of currency in circulation, said the report released on Thursday.

"The value and volume of banknotes in circulation increased by 17 percent and 6.2 percent to Rs 21.10 lakh crore and 1,08,759 million pieces, respectively, in FY19," the report said.

NBFCs Floundering Since IL&FS Crisis

In yet another red flag mentioned in the its annual report, RBI has said that credit flow from NBFCs to commercial sector has dipped 20 percent – from Rs 11.60 lakh crore in FY18 to Rs 9.34 lakh crore – in this financial year, in the aftermath of the IL&FS crisis.

The report also signalled at a cascading effect on the credit flow in general.

Lower issuances of debt and equity by non-financial entities and lower investments by LIC in corporate debt, infrastructure and the social sector resulted in lower credit flow in FY19, the report said.

‘Growth Deceleration Not Structural’

Despite conceding lack in domestic demand, the central bank said that the slowdown is not structural.

"The key question that confronts the economy is: Are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown," the report says adding that the “ongoing deceleration can be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural one."

Stating that aggregate demand has “weakened” more than anticipated, the report says domestic demand is at the “core” of factors that “ails the animal spirits” in the economy.

As a solution to this specific problem, it suggests "continuing focus on improving ease of doing business and reforms in land and labour" laws.

Number of Bank Fraud Cases Saw 15% Jump

The number of cases of frauds reported by banks saw a jump of 15 percent year-on-year basis in 2018-19, with the amount involved increasing by 73.8 percent in the year, RBI's annual report showed.

In FY19, banking sector reported 6,801 frauds involving Rs 71,542.93 crore as against 5,916 cases involving Rs 41,167.04 crore reported in 2017-18.

RBI Virtually Rules Out Stimulus

Amid expectations of a government-led fiscal stimulus in the face of slowdown in the economy from various parts of India Inc, the RBI has virtually ruled out the prospect.

The central bank listed factors like farm loan waivers, implementation of the seventh pay commission report and the various income support schemes which are “constraining” the government’s ability to deliver fiscal stimulus.

The report however terms macroeconomic stability as the “silver lining” expecting inflation to be benign on better monsoons and reining in of fiscal deficit and current account deficit.

(With inputs from PTI.)