Indian banks' nonperforming loans may rise and their capital to risk-weighted assets ratio may edge lower over the next 18 months, though lenders will maintain capital above minimum requirements, according to stress tests conducted by the nation's central bank.
The aggregate gross nonperforming loans ratio of India's 46 largest banks is likely to increase to 3.0% by March 31, 2026, from 2.6% in September 2024, according to the Financial Stability Report published by the Reserve Bank of India (RBI) on Dec. 30.
The ratio of bad loans could, however, rise to as high as 5.3% in the worst-case scenario simulated by the central bank. Bad loans at state-owned banks may rise to as high as 7.3% over the 18-month period from 3.3% in September, while bad loans at private-sector banks may increase to 2.9% from 1.9%, it said.
The stress tests are not forecasts and are based on adverse hypothetical scenarios, the RBI said. The central bank's macro stress tests attempt to project banks' capital ratios under a baseline and two adverse scenarios: higher inflation or economic slowdown over a 1.5-year horizon. The baseline scenario reflects macroeconomic variables based on the RBI's current forecasts.
India's GDP growth unexpectedly slowed to 5.4% year over year in the July-to-September quarter, down from 8.1% a year ago, according to government data released Nov. 29. The slowest GDP growth in seven quarters led the central bank to revise its growth estimate for the fiscal year ending March 31, 2025, to 6.6% from 7.2%. Still, most economists expect higher government spending to boost economic growth in India's fiscal second half, from October 2024 to March 2025.
Growth prospects
"Prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024–25," Sanjay Malhotra, who took over as RBI governor on Dec. 11, said in his foreword on the Financial Stability Report.
"Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability," Malhotra said. "As we strive to preserve financial stability to support a higher growth path for the Indian economy, our focus remains steadfast on maintaining stability of financial institutions and, more broadly, systemic stability."
The RBI's stress tests showed that the aggregate capital to risk-weighted assets ratio (CRAR) of the 46 major Indian banks may edge lower to 16.5% by March 2026, from 16.6% under the baseline scenario. However, aggregate CRAR may deplete to 14.3% and four banks may breach the minimum capital requirement of 9% under the adverse scenario considered by the central bank.
Similarly, the common equity Tier 1 capital ratio of the select 46 banks may rise to 14.1% by March 2026, from 13.9% in September 2024 under the baseline scenario. However, the ratio may worsen to 11.9%, with one bank potentially breaching the minimum capital requirement of 5.5% in the central bank's worst-case scenario.