Perception of riskiness of the Indian banking system has improved in relation to the global financial system, but the contagion risk has risen due to a merger in the sector though it is not a cause of worry, the RBI said without naming HDFC and HDFC Bank that merged this year.
“Macro stress tests for credit risk showed that SCBs (scheduled commercial banks) have sufficient capital buffers and even under adverse stress scenarios their capital ratios will remain above the regulatory minimum,” said the RBI’s 28th Financial Stability Report. “Wider adoption of technology in the financial system amidst a new wave of innovations also poses new challenges for financial stability that would require suitable risk mitigating regulatory and supervisory actions.”
Indian banks are making record profits with rising income from lending and sliding provisions for bad loans. The RBI has over the years ensured that banks raise sufficient capital even if it meant bringing in a few PSBs too under the Prompt Corrective Action scheme that restricted activities till they became financially sound. It is again introducing prudential measures to ensure that the system remains resilient and does not slide back. “We have made significant progress since the onset of the Covid-19 pandemic in steering the economy and the financial system. Now is the time to consolidate these gains,” governor Shaktikanta Das said in his foreword to the report.
The capital adequacy ratio may go down to 13.5% in a medium stress scenario and to 12.2% under severe stress scenario by Sept 2024, which would also remain above the minimum capital requirements, the report said. No SCB would breach the minimum capital requirement of 9% in the next one year.
