Retail loans, which had grown exponentially while corporate credit stayed muted in the last couple of years, may become a systemic risk.

"Empirical evidence suggests that a build-up of concentration in retail loans may become a source of systemic risk," the Reserve Bank of India (RBI) said in its trends and progress in banking report for FY22.

The central bank, however, said in the same breath that it is well-equipped with its policy toolkit to handle any systemic risk that may arise.

The report said in recent years, Indian banks appear to have displayed a "herding behaviour" in "diverting" from the industrial sector towards retail loans. The decline was evident across all groups of banks, including state-owned, private and foreign.

'Systemic as a herd', the report explained, refers to a phenomenon when institutions which are not individually systemically important behave in a way similar to the market leaders and, as a result, get exposed to common risks.

"This could amplify systemic risk through higher co-movement of performance of banks, even though individually they may focus on reducing their standalone bank risk through portfolio diversification," it added.

Analysing the Indian scenario as per globally accepted models, the report said there is no difference between the risk posed by state-owned lenders and private-sector lenders.