From Vulnerabilities to Vigilance: Evolving Credit Risk Measures in India's Financial Sector

Abstract

This document explores the changing dynamics of credit risk within India's financial sector, focusing on recent developments in asset quality, capital reserves, and vulnerabilities specific to various sectors. The study uses a lot of data from different sources to show that banks' and non-banking financial institutions' credit profiles have gotten much better, with fewer non-performing assets and better provisioning strategies. Despite these positive developments, there are still ongoing issues in areas such as unsecured retail lending, microfinance, and the growing small finance sector, where large write-offs and worries about credit discipline continue to show persistent pressures.

The study goes into more detail about the big picture of the economy, showing how strong growth at home, falling prices, and unpredictability in the world economy all affect credit performance. This paper explores the interaction between macroeconomic factors and credit risk, shedding light on the evolving connection between economic stability and lending practices. The study also examines new risks linked to digital lending and innovations in fintech. The fast growth of algorithm-based credit models and the use of alternative data offer big chances to make it easier for people to get credit, but they also make people worry about regulatory holes and possible systemic risks.

This paper examines recent regulatory and supervisory actions designed to strengthen frameworks for managing credit risk in response to these challenges. This assessment focuses on measures like improved capital adequacy standards, stress testing procedures, and the adoption of proactive provisioning frameworks. The evaluation focuses on the efficacy of these regulatory measures, aimed at addressing risks associated with unconventional lending avenues and changing market conditions, and their opportunities for enhancement.

The results provide valuable insights and recommendations for stakeholders, highlighting the importance of ongoing vigilance and proactive risk management to maintain financial stability in an evolving credit landscape.

Keywords: credit risk management, Regulatory Oversight, Financial Stability, Non-performing Assets (NPAs), Digital Lending, Fintech Regulation, Supervisory Measures, Macro-Financial Analysis, Indian Banking Sector, Emerging Credit Markets

JEL Classification: G21, G28, G32, G23, E58