With bad loans at a 10-year low and banks well capitalized, India's lenders can meet minimum capital requirements even under adverse stress scenarios, the Reserve Bank of India (RBI) said.
Banks strengthened capital, with the capital-to-risk-weighted assets ratio (CRAR) and common equity tier 1 (CET1) capital ratio at 17.1% and 13.9% in March, the central bank said in its July 28 Financial Stability Report.
The gross nonperforming asset (NPA) ratio fell to 3.9% in March, the lowest in 10 years, while the net nonperforming asset ratio declined to 1.0%. The results beat the central bank's June 2022 forecast of a 5.3% gross NPA ratio in March.
"Despite a challenging global macroeconomic backdrop, the Indian economy and the domestic financial system remain resilient. 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," the central bank said.
Able to absorb shocks
Stress tests show banks can absorb economic shocks for a year, the central bank said.
The results come as global financial stability faces high inflation, weaknesses in some countries’ banking systems and geopolitical tensions. Still, Asia-Pacific may be strong, as all banks across the region with more than $300 billion in assets had CET1 ratios exceeding the minimum regulatory Basel III requirements at the end of the 2022 fiscal year, S&P Global Market Intelligence data shows.
The central bank expects 6.5% GDP growth, outpacing the International Monetary Fund's forecast 2.8% global growth.
The central bank tested if banks' balance sheets could handle surprises. It assessed capital ratios over a year under baseline, moderate and severe scenarios.
Need for caution
Under baseline conditions, 46 major banks' CRAR may drop to 16.1% in March 2024 from 17% in March, the central bank said. It could fall to 14.7% under moderate stress and 13.3% with severe stress by March 2024 but stay above the 11.5% minimum, including buffer capital.
The CET1 capital ratio of the 46 banks may decrease to 13.1% in March 2024 from 13.7% this year under the baseline scenario. Even with severe stress, the ratio may only drop 290 basis points, above the 8% minimum.
Still, the central bank urged caution.
"High inflation coupled with rise in borrowing costs adversely impacts finances of households and their loan repayment capacity, which can have implications for lending banks," the central bank said.
Simultaneous inflation and rate hikes could imperil even households that can usually repay loans and double at-risk loans, the RBI noted.
