Indian banks’ gross bad loan ratio may rise from a 12-year low if risks emanating from credit quality, interest rates and geopolitics play out, a report published by the central bank on Monday showed.<\/p>\n\n\n\n
Gross bad loan ratio is the proportion of bad assets to total loans.<\/p>\n\n\n\n
This key measure could rise to 3 per cent by the end of March 2026 from a 12-year low of 2.6 per cent in September 2024 for 46 banks under the so-called baseline scenario, the Reserve Bank of India (RBI) said in the Financial Stability Report. <\/small><\/p>\n\n\n\n
The bad loan ratio could rise to 5 per cent and 5.3 per cent under two separate high-risk scenarios, it said.<\/p>\n\n\n\n
While the aggregate capital ratios of banks may reduce, no lender will fall short of the minimum capital requirement of 9 per cent even in adverse cases, the RBI said.<\/p>\n\n\n\n
The Financial Stability Report, published twice a year by the central bank, includes contributions from all financial sector regulators.<\/p>\n\n\n\n
Indian banks’ asset quality has improved over the last few years due to recoveries and write-offs of legacy bad loans, and curtailed growth of bad assets. Banks have also shored up their capital positions.<\/p>\n\n\n\n
Over the last year, the RBI has warned the financial sector against “all forms of exuberance”, tightened rules for credit card and personal loans, made it more expensive for non-banking finance companies to borrow from banks and imposed business restrictions on non-compliant lenders.<\/p>\n\n\n\n
It also wants lenders to adopt strong risk management and governance frameworks and to raise more capital.<\/p>\n\n\n\n
On the whole, banks’ asset quality parameters have improved and their capital levels remain robust, the central bank said.<\/p>\n\n\n\n
The Indian financial system is expected to remain sound and vibrant, supported by further improvement in balance sheets and strong buffers, the RBI said.<\/p>\n\n\n\n
“Although net interest margins have narrowed, banks’ return on equity and return on assets have improved,” it said.<\/p>\n\n\n\n
The balance sheets of non-banking finance companies have strengthened, the RBI said, with stress tests indicating that even under a high-risk scenario, their capital requirements would remain much above the minimum needed level.<\/p>\n\n\n\n
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