Decoding RBI's 326 pages Annual Report in less than 10 minutes


5 min read
Decoding RBI's 326 pages Annual Report in less than 10 minutes

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Today we will talk about RBI's 326 pages annual report which was published on 21 Aug, 2020

Before we get started, Let’s clear out the difference between the fiscal year of RBI and the Government. Previously, unlike our banking system, RBI’s Fiscal year used to start on July 1 and ends next year on June 30. But now both have decided that the fiscal year 2021–22 for the central bank and the government will begin from April 1 and end on March 31.

RBI’s fiscal year 2019–20 ended on June 30, 2020 and  fiscal year 2020–21 started on July 1, 2020 but ends on March 31, 2021. Because RBI  has decided to align its financial year with the Government.


Let’s decode RBI’s 326 pages annual report in less than 10 minutes which was published Aug 21.

We will divide this report into 4 parts:

  1. Takeaway's from RBI’s Income Statement
  2. RBI’s Surplus Transfer to the Government
  3. Net Financial Savings of households (As a % of GNDI)
  4. Fraud cases


1) RBI’s Income statement

RBI’s Total income fell 22.46% YoY to Rs 1.49 lakh crore in the year ended June because other income fell by more than half to Rs 40,339 crore from Rs 86,199 crore in the previous fiscal.

The regulator earns other income from any change in valuation of the foreign exchange held by the RBI, profit or loss on sale or redemption of rupee securities etc.

The RBI’s currency and gold revaluation account, too, rose to Rs 9.77 lakh crore as on June 30 from Rs 6.64 lakh crore a year ago, mainly due to depreciation of the rupee and a rise in the international price of gold. RBI also saw its expenditure toward currency printing fall to Rs 4,378 crore from Rs 4,811 crore in the previous year as fewer currency notes were printed.

Currency notes of Rs 2,000 denomination were not printed in 2019–20.


2. RBI’s surplus transfer to the government

Lower-income and higher provisions meant that the transfer of surplus to the government fell to Rs 57,128 crore from Rs 1.76 lakh crore in the previous fiscal.

The central bank earned less from bond holdings and did not have any one-time gains to transfer unlike in the previous year.

Although the transfer is lower than last year but, it is in-line with what the government had budgeted for. In comments made after the presentation of the Union Budget, government officials had pegged the RBI surplus transfer for the year at about Rs 60,000 crore.


3. Net financial savings of households (As a % of GNDI)


Definitions: Once financial liabilities like loans are subtracted from gross savings, what remains is referred to as net household financial savings. Net disposable personal income (DPI), is the amount of money that households have available for spending and saving after income taxes have been deducted.

The model has three main economic agents: households, firms and the government. Because of the lockdowns imposed to curb the Covid-19 outbreak, people have been forced to stay at home, resulting in reduced labour supply to firms.

Consumption fell as a result of the non-availability of non-essential items and fall in incomes; and restricted people-to-people contact stalled the momentum of the pandemic.

Net financial savings of households have improved to 7.6% of the gross national disposable income in fiscal 2019–20. This is a reversion to trend after the indicator fell to 6.4%, the lowest in the current GDP series, in 2018–19.

As per RBI, Economic activity will reach its trough in Q4 FY21 and recover gradually thereafter, in a scenario that’s closest to reality. Inflation, which was as high at 6.7% Q4 FY20, is projected to ease till Q4 FY21, as per the scenario.

Net financial savings increased by Rs 3.4 lakh crore from a year earlier to 15.7 lakh crore in 2019–20. Financial liabilities increased 0.8 times, while disposable income rose by 1.1 times, indicating consumer deleveraging or reduction in debt levels in 2020–21.


4. Bank frauds

The average lag between the date of occurrence of a fraud and its detection by the bank or financial institution was 24 months and Bank frauds jumped more than twofold in the previous fiscal on delayed detection even as the Reserve Bank of India mandated implementation of early warning signals by lenders.

Bank frauds worth more than Rs 1.85 lakh crore were reported in the year ended June 2020 compared with over Rs 71,500 crore in the previous fiscal.

Public sector banks witnessed a 234% YoY rise in fraud cases which ccounted for 80% of the total cases. Whereas Private banks, which reported a more than 500% rise, formed over 18% of the total fraud cases.

Major reasons: Weak implementation of EWS (early warning signals) by banks, non-detection of EWS during internal audits, non-cooperation of borrowers during forensic audits, inconclusive audit reports and lack of decision making in joint lenders.

  • Card and internet frauds, though constituting a very small amount of the total frauds, increased 174% to Rs 195 crore in 2019–20 from Rs 71 crore in the previous year.
  • Deposit related frauds increased 316% to Rs 616 crore in 2019–20 from Rs 148 crore a year ago.


The average lag of large frauds with the amount involved was more than Rs 100 crore, was 63 months  compares with the average lag of 22 months, and 55 months for large value frauds in the previous fiscal.

RBI is looking at revamping the EWS mechanism — introduced in 2015 for banks to discover, monitor and capture various signals denoting potential risks or vulnerabilities in borrower accounts.

That's it from my side. Although, it's tough to cover every single point but, I tried to cover major points.

Hope it was informative.

Thanks!

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Akshay Seth
Research Analyst (SEBI Regd.)
Linkedin | akshay.equity@gmail.com

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