Indian banks’ bad loan ratio could improve from 10-year lows, RBI says

Mumbai (Reuters) – The Indian banking sector’s bad loan ratio could improve to 3.6% by March 2024 from a 10-year low of 3.9% in March 2023, provided macroeconomic conditions don’t worsen, the Reserve Bank of India’s (RBI) financial stability report showed on Wednesday.

The report includes contributions from all financial sector regulators in the country, and is published bi-annually by the central bank.

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

However, if broader economic conditions worsen, the gross non-performing asset ratio (NPA) of banks – the measure of a bank’s bad loans – 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 swell 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.

The RBI has been increasingly encouraging banks to strengthen governance standards, raise capital buffers and tighten underwriting practices to avoid financial instability, following a series of bank failures in the United States.

All banks would be able to comply with the minimum capital requirements even under adverse stress scenarios, the report said.

Under “adverse situations,” however, some individual banks may fall short of minimum capital requirements, it added.

The Indian economy is resilient, supported by sustained growth momentum, moderating inflation and a lower current account deficit among other factors, the report said.

Slower global growth and potential volatility in the global financial system, however, could pose risks to the growth trajectory, it added.