Scheduled commercial banks (SCBs) are well capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders, per the results of macro stress tests for credit risk conducted by the Reserve Bank of India.

Further, SCBs’ gross non-performing assets (GNPAs) ratio, which moderated to a 12-year low of 2.8 per cent in March 2024 from 3.9 per cent in March 2023 (a 10-year low), may improve to 2.5 per cent by March 2025 under the baseline scenario.

Domestic financial conditions are buttressed by healthy balance sheets across financial institutions, marked by strong capital buffers, improving asset quality, adequate provisioning and robust earnings, the central bank said in the latest financial stability report (FSR). 

“No SCB would breach the minimum capital requirement of 9 per cent over a year ahead horizon,” the RBI said

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Under the baseline scenario, the aggregate CRAR (capital to risk-weighted assets ratio) of 46 major banks is projected to slip from 16.7 per cent in March 2024 to 16.1 per cent by March 2025

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This ratio may go down to 14.4 per cent in the medium stress scenario and to 13 per cent under the severe stress scenario by March 2025, which is still above the minimum capital requirement.

CRAR is computed by dividing the capital of a bank with aggregated risk weighted assets for credit risk, market risk and operational risk. The higher the CRAR of a bank the better capitalised it is.

Stress test for GNPA

If the macroeconomic environment worsens to a severe stress scenario, banks’ GNPA ratio may rise to 3.4 per cent.

Under the severe stress scenario, the GNPA ratios of public sector banks (PSBs) may increase from 3.7 per cent in March 2024 to 4.1 per cent in March 2025, whereas it may go up from 1.8 per cent to 2.8 per cent for private sector banks (PVBs) and from 1.2 per cent to 1.3 per cent for foreign banks.

The report said special mention accounts – 2 (whereby principal or interest payment is overdue between 61-90 days) ratio, which is a leading indicator of asset quality, is also showing relatively low levels of future impairment 

Stress test: NBFCs

Under the baseline scenario, one year ahead GNPA ratio for the system (sample of 163 NBFCs) is estimated to be 3.5 per cent (against actual 4 per cent as at March-end 2024, which is a new low).

System level CRAR is estimated at 21.7 per cent (26.6 per cent in March 2024), with CRAR of 8 NBFCs falling below the minimum regulatory requirement of 15 per cent.

RBI Governor Shaktikanta Das said the FSR highlights the strengthening of balance sheets of financial institutions with low levels of impairments, robust earnings and strong buffers that render the financial system resilient to shocks.

Also read: Rapid growth of private credit can create vulnerabilities that could become systemic: FSR

The results of stress tests demonstrate that capital levels of banks and NBFCs will remain above the regulatory minimum even under severe stress scenario

“Even in this stable environment, we are watchful of the emerging risks, including those from cyber hazards, climate change and global spillovers. The highest priority must be assigned to governance – strong governance is at the core of resilience of stakeholders in the financial system,” Das said.

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