The Reserve Bank on Thursday said the asset quality of banks is likely to further improve by September next year while flagging some concerns for non-banking financial companies.
In its half-yearly Financial Stability Report (FSR), the RBI also said the Indian economy and the domestic financial system remain resilient, supported by strong macroeconomic fundamentals, healthy balance sheets of financial institutions, moderating inflation, improving external sector position and continuing fiscal consolidation.
On the health of the scheduled commercial banks, it said their gross non-performing assets (GNPA) ratio continued to decline to a multi-year low of 3.2 per cent and the net non-performing assets (NNPA) ratio to 0.8 per cent in September 2023.
"Under the baseline scenario, the GNPA ratio of all SCBs may improve to 3.1 per cent by September 2024 from the current level of 3.2 per cent," it said.
If the macroeconomic environment worsens to a medium or a severe stress scenario, the ratio may rise to 3.6 per cent, and 4.4 per cent, respectively.
The RBI said macro stress tests are performed to assess the resilience of SCBs' balance sheets to unforeseen shocks emanating from the macroeconomic environment.
These tests attempt to assess capital ratios over a one-year horizon under a baseline and two adverse (medium and severe) scenarios.
Macro stress tests for credit risk reveal that SCBs would be able to comply with minimum capital requirements, with the system-level capital to risk-weighted assets ratio (CRAR) in September 2024 projected at 14.8 per cent, 13.5 per cent and 12.2 per cent, respectively, under baseline, medium and severe stress scenarios.
The FSR report further said the resilience of non-banking financial companies (NBFCs) improved with CRAR at 27.6 per cent, GNPA ratio at 4.6 per cent, and return on assets (ROA) at 2.9 per cent, respectively, in September 2023.
However, the report said, "Stress in the NBFC sector has been assessed to be higher under a high-risk stress scenario relative to the March 2023 position. Contagion risks may warrant monitoring on account of increased inter-bank exposure".
System-level stress tests for assessing the resilience of the NBFC sector to shocks in credit risk were conducted on a sample of 146 NBFCs.
Macro stress tests are performed to assess the resilience of banks' balance sheets to unforeseen shocks emanating from the macroeconomic environment.
The report said the soundness and resilience of India's banking sector have been underpinned by ongoing improvement in asset quality, enhanced provisioning for bad loans, sustained capital adequacy and a rise in profitability.
Credit growth remains robust, and deposit growth has also gained momentum, the report said.
"Lending by non-banking financial companies (NBFCs) accelerated, led by personal loans and loans to industry, and their asset quality has improved," it said, adding that bilateral exposures among entities in the Indian financial system continued to expand.
The recent increase in risk weights of select retail loan categories may have implications for NBFC credit growth at the overall sectoral and sub-sectoral levels, the report noted.
In his foreword to the RBI's 28th issue of the FSR, governor Shaktikanta Das said India is one of the fastest growing major economies in the world with a rising potential growth profile, and stressed that the central bank remains committed to acting early and decisively to prevent any build-up of risks.
He stressed that achieving durable price stability, ensuring medium-term debt sustainability, further strengthening financial sector resilience, creating new growth opportunities and promoting inclusive and green growth remain key policy priorities.
Observing that the global economy is facing multiple challenges, Das said the Indian economy exhibits macroeconomic resilience, with a robust financial system that is supporting its growth dynamics.
"We remain alert and committed to act early and decisively to prevent any build-up of risks," he added.
He also said that recent macroprudential measures taken by the central bank to curb lenders’ exuberance towards certain segments of retail loans underline its commitment to preserving financial stability without compromising the availability of funds for productive requirements of the economy.
"India is one of the fastest growing major economies in the world with a rising potential growth profile," the governor said, adding that the sharp rebound in growth is underpinned by sound macroeconomic fundamentals, robust domestic demand, and prudent public policies.
The FSR reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the Indian financial system.