MUMBAI: India's banking sector continues to return satisfactory scores on key parameters such as capital adequacy, credit and liquidity risks, supported by robust growth and benign inflation expectations, although asset quality could marginally slip by 2027 from a decadal best currently, the latest central bank study showed.
In his foreword to the Financial Stability Report (FSR), central bank governor Sanjay Malhotra said that the resilience of the domestic financial system is continuously improving, bolstered by strong capital buffers, low non-performing loans and robust profitability.
"Results of stress tests reaffirm the strength of the banking and non-banking sectors with capital levels projected to remain well above the regulatory minimum even under adverse shock scenarios. The healthy balance sheets of corporates, banks and non-bank financial companies (NBFCs) augur well for the economy," Malhotra said.
The Reserve Bank of India's ( RBI) stress test shows that banking asset quality could worsen to 5.6% in case a sharp slowdown in key global economies spills over through trade and financial channels. The tests show that the aggregate capital adequacy ratio of 46 major banks may dip to 14.2% in case of heightened geopolitical risks from 17.2% in March 2025, but none of the banks will fall short of the 9% regulatory minimum requirement under adverse scenarios.
The RBI conducted macro stress tests to assess the resilience of the banking system to macroeconomic shocks, projecting capital ratios and asset quality of banks under three scenarios-a baseline and two adverse macro scenarios assuming a volatile global environment with heightened geopolitical risks and escalation of global financial market volatility and a synchronised sharp growth slowdown in key global economies with spillovers through trade and financial channels over a 2-year horizon.
The stress test results show that the aggregate capital adequacy ratios of 46 major banks may marginally dip to 17% by March 2027 from 17.2% in March 2025, under the baseline scenario and further to 14.2% in case of heightened geopolitical risks. However, none of the banks would fall short of the regulatory minimum requirement of 9% even under the adverse scenarios.
The common equity tier-1 (CET1) capital ratio of the banks may rise from to 15.2% by March 2027 from 14.6% under the baseline scenario falling to 12.5% under adverse scenarios with none of the banks breaching the regulatory minimum requirement of 5.5%.
Even in the extreme case of the top three individual borrowers of respective banks defaulting, the system level capital adequacy would decline by 90 basis points and no bank would face a situation of a drop in the regulatory minimum capital adequacy of 9%.
In case of extreme stress on liquidity caused by plausible run on deposits and increased demand for unutilised portions of committed credit and liquidity facilities, the results showed that the aggregate liquidity coverage ratio of banks would fall from 132.1% in the baseline scenario to 117.9% in the worst scenario. Individually, all banks would be able to maintain LCR above the minimum requirement of 100% in cash of first stress scenario, while one bank would marginally fall short to meet the same in case the cash outflows worsen.
The RBI also did a contagion analysis of the banking system which found that in the hypothetical event of a failure of a bank, the maximum solvency loss would be 3.4% of total tier-1 capital and liquidity loss of 0.3% high quality liquid assets of the banking system.
In his foreword to the Financial Stability Report (FSR), central bank governor Sanjay Malhotra said that the resilience of the domestic financial system is continuously improving, bolstered by strong capital buffers, low non-performing loans and robust profitability.
"Results of stress tests reaffirm the strength of the banking and non-banking sectors with capital levels projected to remain well above the regulatory minimum even under adverse shock scenarios. The healthy balance sheets of corporates, banks and non-bank financial companies (NBFCs) augur well for the economy," Malhotra said.
The Reserve Bank of India's ( RBI) stress test shows that banking asset quality could worsen to 5.6% in case a sharp slowdown in key global economies spills over through trade and financial channels. The tests show that the aggregate capital adequacy ratio of 46 major banks may dip to 14.2% in case of heightened geopolitical risks from 17.2% in March 2025, but none of the banks will fall short of the 9% regulatory minimum requirement under adverse scenarios.
The RBI conducted macro stress tests to assess the resilience of the banking system to macroeconomic shocks, projecting capital ratios and asset quality of banks under three scenarios-a baseline and two adverse macro scenarios assuming a volatile global environment with heightened geopolitical risks and escalation of global financial market volatility and a synchronised sharp growth slowdown in key global economies with spillovers through trade and financial channels over a 2-year horizon.
The stress test results show that the aggregate capital adequacy ratios of 46 major banks may marginally dip to 17% by March 2027 from 17.2% in March 2025, under the baseline scenario and further to 14.2% in case of heightened geopolitical risks. However, none of the banks would fall short of the regulatory minimum requirement of 9% even under the adverse scenarios.
The common equity tier-1 (CET1) capital ratio of the banks may rise from to 15.2% by March 2027 from 14.6% under the baseline scenario falling to 12.5% under adverse scenarios with none of the banks breaching the regulatory minimum requirement of 5.5%.
Even in the extreme case of the top three individual borrowers of respective banks defaulting, the system level capital adequacy would decline by 90 basis points and no bank would face a situation of a drop in the regulatory minimum capital adequacy of 9%.
In case of extreme stress on liquidity caused by plausible run on deposits and increased demand for unutilised portions of committed credit and liquidity facilities, the results showed that the aggregate liquidity coverage ratio of banks would fall from 132.1% in the baseline scenario to 117.9% in the worst scenario. Individually, all banks would be able to maintain LCR above the minimum requirement of 100% in cash of first stress scenario, while one bank would marginally fall short to meet the same in case the cash outflows worsen.
The RBI also did a contagion analysis of the banking system which found that in the hypothetical event of a failure of a bank, the maximum solvency loss would be 3.4% of total tier-1 capital and liquidity loss of 0.3% high quality liquid assets of the banking system.
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