The bad loan ratio for Indian banks touched a ten-year low of 3.9% aBad loan ratio for Indian banks touched 10-year low of 3.9% as of March 2023 and could further improve to 3.6% by March 2024, RBI’s financial stability report says.

 Banks’ bad loans fall to decadal low, may improve further: RBI

The bad loan ratio for Indian banks touched a ten-year low of 3.9% as of March 2023 and could further improve to 3.6% by March 2024 if macroeconomic conditions don’t worsen, the Reserve Bank of India (RBI) said in its bi-annual financial stability report (FSR) on Wednesday.

The net non-performing assets (NPAs) ratio declined to 1%, a level that was last seen way back in July 2011. 

“Macro stress tests for credit risk reveal that all banks would comply with the minimum capital requirements even under a severe stress scenario. Contagion and solvency risks have reduced,” the report said.

However, if the conditions worsen, the gross non-performing asset ratio (NPA) of banks may rise to 4.1% and 5.1%, under medium or severe stress scenarios, respectively, the RBI warned.

Assuming such a scenario, state-run banks’ gross NPA ratio may rise to 6.1% in March 2024 from 5.2% a year ago, while private sector banks can see that number rise to 3.8% from 2.2% in the same period, the central bank said.

Scheduled commercial banks (SCB) would be able to comply with the minimum capital requirements even under severe stress scenarios, the report said.

Stress test results reveal that SCBs are well capitalised and capable of absorbing macroeconomic shocks over a one-year horizon even in the absence of any further capital infusion, the report said.

The system-level capital to risk-weighted assets ratio (CRAR) in March 2024, under baseline, medium and severe stress scenarios, is projected at 16.1%, 14.7% and 13.3%, respectively, the report said.

"...the financial sector in India has been stable and resilient, as reflected in sustained growth in bank credit, low levels of NPAs and adequate capital and liquidity buffers," RBI Governor Shaktikanta Das said in his foreword to the report.

He added that the balance sheets of corporates and banks have strengthened, which present a "twin balance sheet advantage" for growth going forward.

"Financial stability is non-negotiable, and all stakeholders in the financial system must work to preserve this at all times," Das said.