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Stress tests conducted by the Reserve Bank of India to assess the resilience of scheduled commercial banks’ (SCBs) reveal that they are well capitalised and capable of absorbing macroeconomic shocks over a one-year horizon even in the absence of any further capital infusion.
Under the baseline scenario, the aggregate Capital to Risk-Weighted Assets Ratio (CRAR) of 46 major banks is projected to slip from 17 per cent in March to 16.1 per cent by March 2024, according to stress test results published in the Financial Stability Report (FSR).
FSR reflects the collective assessment of the Sub Committee of the Financial Stability and Development Council (FSDC-SC) on prevailing and emerging vulnerabilities to the Indian financial system.
CRAR (percentage of capital funds to risk-weighted assets) of the aforementioned banks may go down to 14.7 per cent in the medium stress scenario and to 13.3 per cent under the severe stress scenario by March 2024, remaining above the minimum capital requirement, including the capital conservation buffer (CCB), of 11.5 per cent.
FSDC-SC said none of the 46 SCBs would breach the minimum capital requirement of 9 per cent in the next one year, even in a severely stressed situation, although 7 SCBs may fall short of the minimum capital inclusive of the CCB.
Stress test
As per the stress test results, the gross non-performing assets (GNPA) ratio of all SCBs may improve to 3.6 per cent by March 2024 under the baseline scenario from the March 2023 level of 3.9 per cent.
If, however, the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1 per cent and 5.1 per cent, respectively.
Stress tests assess the resilience of banks’ balance sheets to unforeseen shocks emanating from the macroeconomic environment.
The FSDC-SC noted that despite a challenging global macroeconomic backdrop, the Indian economy and the domestic financial system remain resilient.
It emphasised that the health of the banking system is a positive in this environment, with improving profitability and asset quality and sufficient levels of capital and liquidity buffers.
SCBs’ GNPA ratio continued its downtrend and fell to a 10-year low of 3.9 per cent in March 2023 and the NNPA ratio declined to 1.0 per cent.
Banks’ profit grows
The provisioning coverage ratio (PCR) rose to 74.0 per cent. Led by strong growth in net interest income and significant reduction in provisions, the profit after tax of SCBs registered a growth of 38.4 per cent in 2022-23.
The report said healthier balance sheets are catalysing sustained and broad-based pick-up in the momentum of credit growth, with credit flow improving to all sectors of the economy.
Despite the recent step up in bank credit growth, India’s credit-to-GDP gap remains negative since March 2013, reflecting still muted credit absorption in India relative to advanced and emerging market peers, per the FSR.
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