RBI says bad loans hit 10-year low as capital reserves stay strong

The RBI (Reserve Bank of India) released its Financial Stability Report on Tuesday, June 28, revealing positive trends in the banking sector while cautioning that economic fragmentation is threatening macroeconomic prospects, especially among emerging markets and developing economies. 

 According to the report, the gross non-performing assets (GNPA) ratio of banks has reached a 10-year low of 3.9 per cent as of March 2023. The net non-performing assets (NNPA) ratio has also declined to 1.0 per cent. 

The report further highlights that stress tests indicate banks' ability to meet minimum capital requirements even under severe stress scenarios. Stress test results demonstrate that scheduled commercial banks (SCBs) are well-capitalized and capable of withstanding macroeconomic shocks over one year, even without additional capital infusion.

In his foreword, RBI governor Shaktikanta Das said, “Since the last issue of the Financial Stability Report in December 2022, the global and Indian financial systems have charted somewhat different trajectories. Significant strains have impacted the global financial system since early March 2023 from the banking turmoil in the U.S. and Europe.

In contrast, the financial sector in India has been stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets and adequate capital and liquidity buffers. The banking and corporate sector balance sheets have been strengthened, engendering a ‘twin balance sheet advantage’ for growth.” 

The report published on Wednesday read, "As per the stress test results, the GNPA ratio of all SCBs may improve to 3.6 per cent by March 2024." It also projected the system-level capital to risk-weighted assets ratio (CRAR) in March 2024 under different stress scenarios: 16.1 per cent under the baseline scenario, 14.7 per cent under the medium stress scenario, and 13.3 per cent under the severe stress scenario. 

The Financial Stability Report (FSR) is a biannual publication by the RBI that provides insights into the health of the Indian banking system. It emphasises the overall improvement in asset quality for scheduled commercial banks, with a notable decline in the stressed advances ratio across significant sectors. However, the report highlights a marginal rise in impairments within the credit card receivables segment, despite improvements in asset quality for personal loans. 

The report also notes the continuous improvement in asset quality across sub-sectors within the industrial sector. The RBI further predicted that the common equity tier I capital ratio for select 46 SCBs may decrease from 13.7 per cent in March 2023 to 13.1 per cent by March 2024 under the baseline scenario. Importantly, even in severely stressed macroeconomic conditions, the aggregate CET1 capital ratio is expected to decline by only 290 basis points, remaining within the minimum regulatory norms.