Banks have strong enough capital and liquidity buffers to withstand future shocks as the impact of the pandemic on their balance sheets has not been as severe as projected earlier, a report from the Reserve Bank of India (RBI) said.
The Financial Stability Report is published bi-annually by the RBI on behalf of the Financial Stability and Development Council, an umbrella group of regulators which gives an overview of the health of India's financial system.
The report said banks' gross non-performing assets could rise to 9.8 per cent of total assets by March 2022 from around 7.48 per cent as of the end of March this year under a baseline scenario and to 11.22 per cent under a severe stress scenario.
The projections are much less pessimistic than the report released in January, in which the RBI had said that bad loans could double in a severely stressed scenario.
"Capital and liquidity buffers are reasonably resilient to withstand future shocks, as the stress tests presented in this report demonstrate," RBI Governor Shaktikanta Das, wrote in the foreword to the report.
He also said there are new risks which have emerged on the horizon, including potential future waves of the coronavirus pandemic, international commodity prices and inflationary pressures and rising instances of data breaches and cyber attacks.
The report showed that Indian banks, which have been carrying a significant bad loan burden for several years, managed to bring down bad loans to 7.5 per cent in March 2021, compared with 8.5 per cent in March 2020 despite the pandemic-led challenges.
"Unprecedented policy support has contained the impairment of balance sheets of banks in India despite the dent in economic activity brought on by waves of the pandemic," the report said. Lenders also have sufficient capital even under a stress scenario, it stated.
The RBI did also say that downside risks remained, especially from loans given to small and medium enterprises. Subdued loan growth can also adversely impact net interest income levels of banks, it added.