MUMBAI: Indian banks‘ gross non-performing assets remained at a 12-year low of 2.6% of total assets as of September 2024. However, RBI’s stress test projects the figure could rise to 3% by March 2026 under the baseline scenario. It has also expressed concern that a sharp rise in write-offs, particularly among private sector banks, could signal worsening asset quality.
The stress test results, published in the bi-annual financial stability report released on Monday, indicate that in an adverse scenario, gross NPAs could further increase to 5%. Under the worst-case scenario (adverse scenario 2), gross NPAs could climb to 5.3%.
“Credit risk is comparatively severe under adverse scenario 2. The GNPA ratios of public sector banks may rise from 3.3% in Sept 2024 to 7.3% in March 2026, whereas it may increase from 1.9% to 2.9% for private sector banks and from 0.9% to 1.4% for foreign banks,” the report stated.
The stress test results further reveal that the aggregate capital to risk-weighted assets ratio (CRAR) of 46 major scheduled commercial banks may decline slightly from 16.6% in Sept to 16.5% by March 2026 under the baseline scenario and to 15.7% under adverse scenario 2. No bank is projected to fall below the minimum capital requirement of 9% under these scenarios. However, under adverse scenario 1, the aggregate CRAR of SCBs may drop to 14.3%, with four banks potentially breaching the minimum capital requirement.
The report also highlighted vulnerabilities in the Indian financial system, including stretched equity valuations, stress in the microfinance and consumer credit segments, and risks from external spillovers. “An area of concern, however, is the sharp rise in write-offs, especially among private sector banks, which could partly mask worsening asset quality in this segment and dilution in underwriting standards,” RBI noted. Fresh NPAs in retail loan portfolios were predominantly driven by slippages in unsecured loans, which accounted for 51.9% of new NPAs as of Sept 2024. Among bank groups, small finance banks are experiencing greater impairments in their retail lending portfolios, with a GNPA ratio of 2.7%, an SMA (1+2) ratio of 3.6%, and an unsecured GNPA ratio of 4.7%.
The microfinance sector is also showing signs of stress, with rising delinquencies across various types of lenders and ticket sizes.
Globally, the report flagged risks associated with “tokenisation,” the creation of digital representations of real-world assets using distributed ledger technology. While still in its early stages and presenting limited financial stability concerns, tokenisation could increase interconnectedness between traditional financial systems and decentralised platforms, including crypto-assets, with potential spillover effects on the broader financial system.
