RBI Annual Report for 2020-21

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    In News

    Recently, the Reserve Bank of India (RBI) has released its annual report for 2020-21.

    Key Highlights

    • Impact of Covid-19 Waves
      • While the economy has not moderated to the extent during the first wave of Covid-19, the surrounding uncertainties can act as a deterrent in the immediate period.
      • The onset of the second wave has triggered a raft of revisions to growth projections.
      • The waiver of compound interest on all loan accounts that had opted for moratorium during March-August 2020 may put stress on banks’ financial health.
    • Fall in Cards Transaction Value
      • The value of credit card transactions declined by Rs. 1 lakh crore to Rs. 7,30,895 crore in 2020-21 from Rs. 6,30,414 crore in 2020.
      • The number of card payment transactions carried out through credit cards and debit cards decreased by 19 per cent and 20.6 per cent, respectively.
      • This resulted in a decrease in value of credit card transactions by 13.7 percent and debit card transactions by 5.9 per cent during the same period.
    • Increased Digital Payments
      • Digital modes of payments increased manifold in the wake of the pandemic, resultant lockdowns and people shopping from homes mostly using digital transactions.
      • Overall, the total digital transaction volume in 2020-21 stood at 4,371 crore, as against 3,412 crore in 2019-20, attesting to the resilience of the digital payment system in the face of the pandemic.
      • Transactions through the National Electronic Funds Transfer (NEFT) system rose by 12.7 per cent.

    (Image Courtesy: BL)

    • Rupee’s Status
      • The rupee gained by 3.5 per cent (based on USD/rupee closing rates as at end-March 2021 over end-March 2020).
      • However, it underperformed vis-a-vis its Asian peers during 2020-21.
      • In Q4 of 2020-21, while the Indian rupee remained supported by foreign portfolio flows and merchant-related inflows, aiding the RBI to sell dollars at a gain, dollar purchases almost matched sales.
    • Balance Sheet 
      • The size of the RBI balance sheet increased by 6.99 per cent from Rs. 53,34,792 crore as on 30th June 2020 to Rs. 57,07,669 crore as on 31st March 2021.
      • Banks were better positioned than before in managing stress in their balance sheets in view of higher capital buffers, improvement in recoveries and a return to profitability.
    • Provision Coverage Ratio
      • The gross non-performing assets ratio of scheduled commercial banks declined to 6.8 per cent by end-December 2020, from 8.2 per cent in March 2020.
      • However, prudent provisioning had resulted in an improvement in the provision coverage ratio to 75.5 percent from 66.6 percent.
    • Gain from Foreign Exchange
      • RBI’s gain from foreign exchange (Forex) transactions rose from Rs. 29,993 crore to Rs. 50,629 crore in 2020-21.
    • Transfer of Surplus
      • Under Section 47 of the RBI Act (1934), RBI transferred the surplus to the government following a sharp fall in provisions and gains from forex transactions during the year ending with March 2021.
      • It transferred Rs. 99,122 crore to the government.
      • A big part of this was profit from the sale of dollars during the last three months of FY21 (USD 25.94 billion in March, USD 24.57 billion in February and USD 15.37 billion in January).
      • The move is likely to boost the government’s finances and help it combat the second wave of the Covid-19 pandemic.
    • Predictions for Next Year
      • The RBI is expecting a 10.5 per cent growth for the FY 2021-22.
      • With the increased vaccination and Covid-19 cases falling, a sharp turnaround in growth is likely, supported by strong favourable base effects.
      • Demand-supply imbalances could continue to exert pressure on the prices of pulses and edible oils even as cereals prices could likely see softening on the back of bumper foodgrains production in 2020-21.
      • It expects global crude oil prices remaining volatile in the near term.
      • The prospects for FinTech in India’s financial system in 2021-22 will depend upon the degree of entrenchment of digital usage.
    • Suggestions
      • For a self-sustaining GDP growth trajectory post-Covid-19, a durable revival in private consumption and investment demand together would be critical.
        • Both private consumption and investment account for around 85 per cent of GDP.
      • It has asked banks to closely monitor bad loans and prepare for higher provisioning and the Supreme Court (SC) order lifting the ban on classification of non-performing assets (NPAs).
      • It is important for the government to adhere to a clear exit strategy and build fiscal buffers, which can be tapped into in events of future shocks to growth.
    National Electronic Funds Transfer

    • It is a nation-wide payment system facilitating one-to-one electronic funds transfer among individuals, firms and corporations.
    • It facilitates originators or remitters to initiate funds transfer transactions even without having a bank account.
    • It is different from Real Time Gross Settlement (RTGS), which can be explained as a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction by transaction basis.

    Foreign Portfolio Investment

    • It is the purchase of securities of foreign countries, such as stocks and bonds, on an exchange.
    • It involves holding financial assets from a country outside of the investor’s own.
    • Along with Foreign Direct Investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
    • Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.

    Non-Performing Assets

    • These are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time.
    • Simply stated, NPAs are those loans which have ceased to generate income for the bank, hence they are commonly referred to as bad loans.
    • They indicate how much of a bank’s loans are in danger of not being repaid. If interest is not received for 3 months, a loan turns into NPA.
    • A very high gross NPA ratio means the bank’s asset quality is in very poor shape.

    Foreign Exchange

    • It is a global market for exchanging national currencies with one another.
    • Forex venues comprise the largest securities market in the world by nominal value, with trillions of dollars changing hands each day.1?
    • Forex trading utilizes currency pairs, priced in terms of one versus the other.
    • Forwards and futures are another way to participate in the forex market.

    Section 47 of the RBI Act, 1934

    • Under the section, after making provisions for bad and doubtful debts, depreciation in assets, contribution to staff and superannuation funds and for all matters for which provisions are to be made by or under the Act or that are usually provided by bankers, the balance of the profits of the RBI is required to be paid to the central government.

    FinTech

    • It is a word made by blending the terms “finance” and “technology”.
    • It refers to any business that uses technology to enhance or automate financial services and processes.
    • The term is a broad and rapidly growing industry serving both consumers and businesses.

    Exit Strategy

    • It is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company.
    • It gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a substantial profit.

    Source: TH