India’s financial system, including banks and NBFCs are in a position to withstand even the worst of macro economic stress emanating from global spillovers and the central bank will focus on management of shocks and building the buffers of financial system, the RBI said in its half yearly Financial Stability Report.

The central bank’s stress test on the banking system indicates that in a baseline scenario the gross non-performing assets in the banking system will improve to 4.9% by September 2023. The total bad loan ratio of the banking system is steadily trending down to a seven-year low of 5.0% in September 2022, while net non-performing assets have dropped to ten-year low of 1.3% of total assets.

“Amidst global shocks and challenges, the Indian economy presents a picture of resilience,” Shaktikanta Das, Governor, RBI noted in the foreword to the report. Financial stability has been maintained. Domestic financial markets have remained stable and fully functional. The banking system is sound and well-capitalised. The non-banking financial sector has also withstood these challenges. Stress test results presented in this issue of the FSR indicate that banks would be able to withstand even severe stress conditions, should they materialise.“

The central bank’s stress test indicates that if the macroeconomic environment worsens to medium stress the bad loan ratio may rise to 5.8%. While in the case of severe stress scenario bad loans could rise to 7.8%.

The stress tests also indicate that under severe stress scenario bad loans for state-run banks could swell from 6.5% in September 2022 to 9.4% in September 2023. For private sector banks bad loans could go up from 3.3% to 5.8% during the same period.

In terms of capital position of banks, the stress tests indicate that the Capital to Risk Weighted Assets Ratio (CRAR) of 46 major banks is projected to slip from 15.8% in September 2022 to 14.9% by September 2023.

It may go down to 14.0% in the medium stress scenario and to 13.1% under the severe stress scenario by September 2023, but it will stay above the minimum capital requirement.
None of the 46 banks would breach the regulatory minimum capital requirement of 9% in the next one year, even in a severely stressed situation, RBI tests show.

“Macro-stress tests for credit risk reveal that banks are well-capitalised and would be able to comply with the minimum capital requirements even under adverse stress scenarios,” the central bank noted in its report. “Banks are capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.”

The Common Equity Tier 1 (CET1) ratio of 46 banks may decline from 12.8% in September 2022 to 12.1% by September 2023 under the baseline scenario. Even in a severely stressed macroeconomic environment, the aggregate CET1 capital ratio would deplete only by 210 basis points, which would not breach the minimum regulatory norms.


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