Indian banks' bad loan ratio is expected to edge higher after it reached a multidecade low, as of March 31, according to a report by the central bank.
Aggregate gross nonperforming assets (NPAs) at the 46 largest commercial banks in India are expected to rise to 2.5% over the next two years from 2.3% at the end of the fiscal year that ended on March 31, the Reserve Bank of India (RBI) said in its Financial Stability Report published June 30.
The aggregate gross NPA of the same sample of 46 banks could go as high as 5.6% in one of the two adverse scenarios in stress tests conducted by the central bank. One of the two hypothetical adverse scenarios the RBI considered in its stress tests was heightened geopolitical risks and supply chain disruptions leading to higher inflation. The other scenario was a synchronized sharp slowdown of major global economies, it said.
Indian banks' credit and deposit growth is declining, although India remains the fastest-growing major economy in the world. The central bank expects GDP to grow 6.5% in the fiscal year that started on April 1, a pace similar to the previous year, helped by domestic consumption and investment. External headwinds from geopolitical tensions and possible trade disruptions remain key risks for the South Asian nation's economy.
The central bank said aggregate deposit growth at commercial banks slowed to 10.5% year over year, as of June 13, compared with 10.7% in the quarter ended March 31. Credit growth moderated to 9.6% year over year, from 11% over the same period.
Healthy ratios
The aggregate capital to risk-weighted assets ratio (CRAR) of the banks sampled by the central bank may edge lower to 17.0% over the next two years, from 17.2% at the end of the fiscal year ended March 31, the RBI said. Aggregate CRAR may fall to as low as 14.2% under one of the adverse scenarios in the stress tests, though none of the banks would fall short of the regulatory minimum requirement of 9%, even under the adverse scenarios, according to the report.
The aggregate common equity Tier 1 capital ratio of the select 46 banks may rise from 14.6% in March 2025 to 15.2% by March 2027 under the central bank's baseline scenario. However, it may fall to 12.5% under the adverse scenario. Still, none of the banks would breach the regulatory minimum requirement of 5.5%, the RBI said.
"Results of stress tests reaffirm the strength of the banking and nonbanking sectors with capital levels projected to remain well above the regulatory minimum even under adverse shock scenarios," RBI Governor Sanjay Malhotra said in a foreword to the report. "The healthy balance sheets of corporates, banks and nonbank financial companies augur well for the economy."
Similar stress tests on a sample of 158 nonbank financial companies showed that system-level gross nonperforming assets may rise to 3.3% in the current fiscal year to March 31, 2026, from 2.9% at the end of the year that ended on March 31, 2025. Consequently, their aggregate CRAR may fall to 21.4% from 23.4% over the same period.
