The Reserve Bank of India (RBI), in its financial stability report, said banks' non-performing asset (NPA) ratio could rise to 3.6% and 4.4% if the macroeconomic environment turns into a medium and severe stress scenario, respectively worsened.

The gross NPA ratio of all regular commercial banks fell to its lowest level in 11 years at 3.2% at the end of September 2023.

In the baseline scenario, the GDP ratio of all SCBs could improve from the current 3.2% to 3.1% by September 2024, the report said.

Macro stress tests are conducted to assess the resilience of bank balance sheets to unforeseen shocks from the macroeconomic environment.

At the banking group level, the GNPA ratio of public sector banks (PSBs) could increase from 4.4% in September 2023 to 5.1% in September 2024, while for private banks it could increase from 2.1% to 3.6% and 1.6% for private banks could rise to 1.8% for foreign banks in severe stress scenario, the RBI report said.

As the GNPA inventory declined, the need for provisions also decreased. The ratio of write-offs to GNPA increased in the first half of 2023-24 mainly due to reduction in GNPA inventory across bank groups.

The sustained decline in GNPA stock since March 2018 is mainly due to the sustained decline in new NPA accruals; write-offs and clawbacks; and higher modernization in the post-pandemic period, says RBI.

Improving the quality of lenders' assets is broad-based, the central bank said. The GDP ratio of the agricultural sector remains high at 7%. Overall, asset quality in the personal credit segment has improved, although there was a marginal impairment in credit card receivables. In the industrial sector, asset quality improved in all major subsectors except infrastructure and petroleum.

As the growth of retail loans outpaces borrowings by large borrowers, their share in SCBs' gross loans continued to decline between March 2020 and September 2023. Large borrowers in banks' GNPAs continued to decline. As of September 2023, none of the top 100 borrower accounts are in the NPA category anymore.

Macro credit risk stress tests suggest that all banks would be able to meet minimum capital requirements even in a severe stress scenario, the banking regulator said.

The stress in the NBFC sector was assessed to be higher in a high risk stress scenario compared to the March 2023 position. Contagion risks may require monitoring due to increased interbank risk, says RBI.

The soundness and resilience of the Indian banking sector has been underpinned by continuous improvement in asset quality, improved provision for bad loans, sustained capital adequacy and improvement in profitability, it said.