According to the Reserve Bank of India’s Financial Stability Report released recently, the Gross Non-Performing Assets (GNPA) ratio of banks is expected to witness a potential decline to 3.1% by September of the coming year, down from the current 3.2%. However, in a severe stress scenario, this ratio may rise to 4.4%, as outlined in the bi-monthly report.

The report highlights that despite the likelihood of a macroeconomic environment downturn, banks have showcased an improvement in their asset quality. The proportion of bad loans in total credit has steadily decreased over recent quarters, reaching a decade-low GNPA ratio of 3.9% as of March this year.

Examining specific bank groups, the GNPA ratios for public sector banks could rise from 4.4% in September 2023 to 5.1% by September 2024. Similarly, for private banks, the ratio may increase from 2.1% to 3.6% in the severe stress scenario.

Stress test results indicate that banks are adequately capitalized and capable of absorbing macroeconomic shocks, even without further capital infusion from stakeholders. The report affirms that banks, under various stress scenarios, would meet the minimum capital requirements comfortably.

In the baseline scenario, the projected aggregate Capital to Risk-Weighted Assets Ratio (CRAR) for 46 major banks might decrease from 16.6% in September 2023 to 14.8% by September 2024. However, this remains well above the minimum capital requirements. Under severe stress, the CRAR might fall to 12.2%, still maintaining a buffer above the regulatory norms.

The Common Equity Tier 1 (CET1) ratio for 46 select banks might decrease from 13.6% in September 2023 to 12.2% by September 2024 in the baseline scenario. Even in a severely stressed economic environment, while the CET1 ratio may reduce by 360 basis points, all banks are expected to meet the minimum regulatory CET1 ratio of 5.5%.

Overall, the report presents a cautiously optimistic outlook, forecasting an improvement in banks’ asset quality while emphasizing their resilience to potential stress scenarios and their ability to maintain regulatory capital adequacy.

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