India’s financial system remains resilient and well-capitalised, despite heightened global uncertainties, with banks showing strong balance sheets and adequate capital buffers to withstand adverse stress scenarios, says the financial stability report (FSR) released by the Reserve Bank of India (RBI).
RBI says the domestic banking sector continues to benefit from improved asset quality, strong profitability and comfortable capital adequacy levels, even as risks from global economic slowdown, geopolitical tensions and volatile financial markets persist. The central bank cautioned that external spillovers and tightening global financial conditions remain key downside risks to financial stability.
Asset Quality Improves, Capital Buffers Remain Strong
The report noted a sustained improvement in asset quality across scheduled commercial banks (SCBs), with the gross non-performing assets (GNPA) ratio continuing its downward trajectory. The decline has been supported by higher recoveries, write-offs and improved credit underwriting standards, particularly in the corporate loan segment.
Capital adequacy levels of banks remain well above regulatory requirements, providing sufficient loss-absorbing capacity. The FSR says strong internal accruals and improved profitability have helped banks strengthen their capital position, enabling them to support credit growth while maintaining balance sheet resilience.
Stress Tests Show Banking System Can Absorb Shocks
According to RBI’s macro stress tests, the banking system is well-placed to withstand severe stress scenarios. "Even under adverse macroeconomic assumptions, including sharp deterioration in growth and financial market conditions, banks’ capital ratios remain above the minimum regulatory thresholds," the report says.
Public sector banks (PSBs) as well as private sector banks (PVBs) demonstrated resilience under stress, RBI says, cautioning that a few weaker banks could face capital pressures under extreme scenarios, requiring close supervisory monitoring.
Credit Growth Robust, but Risk Concentration Flagged
The FSR observed that credit growth remains robust, driven by demand from retail, services and infrastructure sectors. While the expansion in bank lending supports economic activity, the report flagged rising risk concentrations in certain loan segments, particularly unsecured retail credit.
Expressing concerns over the growth of private credit, RBI says, it could be another potential source of vulnerability. "From a simple intermediation chain - where investors put money into a private credit fund or business development company (BDC) that then lends to businesses – the system has evolved in recent years into more complex chains that now include more leveraged institutions like banks and insurers. Since they are private in nature and unregulated, there is considerable opacity regarding the size and riskiness of the private credit industry. Moreover, bank lending to private credit vehicles has increased significantly. Thus, the interconnectedness between private credit and the broader financial system is increasing and the channels through which stress in private credit could transmit to the rest of the financial system are growing."
The central bank says lenders need to remain vigilant on underwriting standards and risk pricing, especially in fast-growing portfolios, to prevent the build-up of future asset quality stress.
NBFCs Stable but Interconnectedness Remains a Concern
According to RBI, non-banking financial companies (NBFCs) continue to show stable financial performance, supported by improved asset quality and better access to funding. However, the report highlighted that interconnectedness between banks, NBFCs and capital markets has increased, amplifying the potential transmission of shocks during periods of stress.
RBI reiterated the need for strong governance, prudent liquidity management and enhanced risk oversight among NBFCs, particularly larger systemically important entities.
Household Leverage and External Risks under Watch
The report also drew attention to rising household leverage, driven by growth in retail loans. While debt servicing capacity remains comfortable at present, RBI warned that prolonged high interest rates or income shocks could affect household balance sheets.
On the external front, the FSR flagged risks from global monetary tightening, geopolitical tensions and volatile capital flows. The central bank says India’s strong foreign exchange reserves and improving external sector indicators provide a buffer against external shocks, but vigilance remains essential.
Financial Stability Outlook Remains Stable
Overall, RBI says the outlook for India’s financial system remains stable, supported by macroeconomic fundamentals, regulatory oversight and improved balance sheets across financial institutions. The central bank reaffirmed its commitment to proactive supervision and timely policy interventions to safeguard financial stability.
“The Indian financial system remains resilient and well-capitalised, capable of supporting sustainable economic growth even in the face of heightened global uncertainties,” RBI says in the FSR report.
