The sharp fall in bad loans of Indian banks to a 12-year low of 2.8% and strong GDP numbers will help in sustaining the growth momentum and withstanding global shocks, said the Reserve Bank of India's Financial Stability Report (FSR) released on Thursday.

Despite several challenges including sluggish demand, India’s real gross domestic product (GDP) rose by 8.2% in 2023-24 versus 7% a year ago. 

According to the FSR report, Indian scheduled commercial banks' gross non-performing asset (NPA) ratio was down to 2.8% while the net NPA ratio fell to 0.6% at end of March 2024.

The gross NPA ratio of all SCBs may improve to 2.5% by March 2025, the report noted.

Banks have gained from high profitability and declining NPAs. The return on assets (RoA) of scheduled commercial banks (SCBs) and their return on equity (RoE) are close to decadal highs at 1.3% and 13.8%, as per the report.

The capital to risk-weighted assets ratio (CRAR) and the common equity tier 1 (CET1) ratio of SCBs stood at 16.8% and 13.9%, respectively, at end-March 2024, it said.

As per the report, macro stress tests for credit risk reveal that SCBs would be able to comply with minimum capital requirements, with the system-level CRAR in March 2025 projected at 16.1%, 14.4% and 13%, respectively, under baseline, medium and severe stress scenarios.

Non-banking financial companies' (NBFCs) CRAR stood at 26.6% at end-March 2024 while their gross NPA ratio at 4% and RoA at 3.3%, respectively, at end-March 2024.

The FSR said there are several positives for the near-term economic outlook, including robust domestic demand conditions, high business optimism, the government's sustained focus on capital expenditure (which should crowd in more private investment through multiplier effects), firms utilising high profits to augment investible resources, and real estate activity gathering pace.

Another big positive is that credit growth is deepening, supported by healthier bank balance sheets, it said.

"Downside risks to this outlook stem from global slowdown and spillovers, geopolitical risks and their impact on supply conditions and commodity prices, slack in the rural economy and uncertainties related to weather conditions," it added.

The RBI's report noted that the global financial system remains resilient, despite successive high-impact shocks and the challenges stemming from uncertain growth prospects, elevated public debt, prolonged geopolitical conflicts and the slow progress in the last mile of disinflation.

Near-term global macro financial risks have receded, helped by progress in lowering inflation and the ongoing economic recovery, it said.

The last mile of disinflation, however, remains complex and delay in aligning inflation to target could unmoor investor expectations, tighten financial conditions and worsen existing fragilities.

"Amidst an uncertain and challenging global backdrop, the Indian economy is displaying steady growth and has been a significant contributor to global growth. Economic resilience and improved prospects are anchored by macroeconomic stability," the report said.

Bolstered by a healthy banking system, the domestic financial system remains stable and supportive of real activity.

"With improved balance sheets, banks and financial institutions are supporting economic activity through sustained credit expansion," the RBI report said.

In the foreword to the half-yearly FSR published by the central bank, RBI governor Shaktikanta Das said that amid global headwinds, the Indian economy is exhibiting strength and resilience with strong macroeconomic fundamentals and buffers.

Das said economic activity is expanding at a steady pace with the financial system being stronger and more vibrant than what it was before the onset of the recent period of crises.