RBI stress test finds banks resilient but capital buffers may shrink

Mumbai: Scheduled commercial banks (SCBs) are well-positioned to withstand severe macroeconomic shocks, with their capital buffers expected to remain above regulatory minimums even under adverse scenarios, although prolonged geopolitical tensions could erode capital adequacy and push up bad loans, according to the Reserve Bank of India’s June 2026 Financial Stability Report (FSR) released on Tuesday.

RBI’s macro stress tests covered 46 major banks over two years, under a baseline scenario and two adverse scenarios involving prolonged geopolitical tensions, high energy prices, currency pressures, inflation and slower growth. The macro stress test results suggest the resilience of SCBs to macroeconomic shocks, the central bank said.

Under the baseline scenario, the aggregate common equity tier-1 (CET-1) ratio—the highest quality capital held by banks–is projected to decline to 13.9% by March 2028 from 15.2% in March 2026.

The ratio could fall to 11.6%, while a more prolonged geopolitical conflict under the second adverse scenario could pull it down further to 11.4%, under the first adverse scenario. Despite the decline, all banks would continue to meet the minimum CET-1 capital ratio requirement of 5.5% under all the scenarios, RBI said.

The aggregate capital-to-risk weighted assets ratio (CRAR) is also expected to moderate from 17.5% in March 2026 to 15.6% by March 2028 under the baseline scenario. It could decline to 13.3% and 13.0%, respectively, under the two adverse scenarios.

While no bank is expected to breach the regulatory minimum CRAR requirement of 9% under the baseline scenario, one bank could fall below the threshold under the first adverse scenario and two banks under the more severe second scenario, according to the report.

Asset quality is also likely to deteriorate if macroeconomic conditions worsen. The aggregate gross non-performing asset (GNPA) ratio of the 46 banks is projected to inch up to 1.9% by March 2028 under the baseline scenario from 1.8% in March 2026. However, it could rise sharply to 3.8% and 4.1% under adverse scenarios, respectively.

RBI also conducted sensitivity tests to gauge banks’ resilience to individual risks, including credit, interest rate and liquidity shocks.

Under the most severe credit shock, assuming the system-wide GNPA ratio rises to 8.1%, the aggregate CRAR and CET1 ratios would decline by 400 basis points and 420 bps, respectively.

Even then, both ratios would remain above the regulatory minimum, although the banking system could suffer capital impairment of 25.2%.

At the individual bank level, four banks accounting for around 12% of total SCB assets would breach the minimum CRAR requirement under the most severe credit stress scenario.

According to the report, public sector banks would witness relatively higher capital depletion than private sector and foreign banks under severe credit stress. Alongside credit risk, RBI assessed banks’ resilience to interest rate and liquidity risks through separate sensitivity analyses, with the banking system remaining broadly resilient across stress scenarios.