Banks fare well in stress test, NBFCs show some weakness: RBI report

Mumbai: Banks will be able to comply with minimum capital requirements under severe stress scenarios, while some weaknesses were witnessed in the NBFC sector compared to the March 2023 position, according to an RBI's Financial Stability Report released on Thursday.

The report reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the resilience of the Indian financial system.

According to the report, India's financial sector has displayed stability and resilience, with ongoing improvement in asset quality, capital position and profitability during the first half of 2023-24.

Macro stress tests for credit risk indicate that even under a severe stress scenario, all banks would be able to comply with minimum capital requirements, it added.

However, the report said, "Stress in the NBFC sector has been assessed to be higher under a high-risk stress scenario relative to the March 2023 position. Contagion risks may warrant monitoring on account of increased inter-bank exposure."

System-level stress tests for assessing the resilience of the NBFC sector to shocks in credit risk were conducted on a sample of 146 NBFCs.

Macro stress tests are performed to assess the resilience of banks' balance sheets to unforeseen shocks emanating from the macroeconomic environment.

FSR said the soundness and resilience of India's banking sector have been underpinned by ongoing improvement in asset quality, enhanced provisioning for bad loans, sustained capital adequacy and a rise in profitability.

Credit growth remains robust, and deposit growth has also gained momentum, the report said.

"Lending by non-banking financial companies (NBFCs) accelerated, led by personal loans and loans to industry, and their asset quality has improved," it said, adding that bilateral exposures among entities in the Indian financial system continued to expand.

The recent increase in risk weights of select retail loan categories may have implications for NBFC credit growth at the overall sectoral and sub-sectoral levels, the report noted.

According to the FSR, the total outstanding bilateral exposures among the entities in the Indian financial system continued to expand, and the share of interbank exposures in the total assets of the banking system reached a 3-year peak in September 2023.

"Though contagion risk and consequent additional solvency losses to the banking system have increased marginally, it would not lead to failure of any bank," it said.

The Indian financial system is confronted with heightened global uncertainty and spillovers, it said, adding that close and continuous monitoring is warranted to detect any undue risk build-up in the system.

This, FSR said, has to be supported by prudent management of exposures and building of financial buffers.