RBI’s stress test projects a marginal rise in bank bad loans to 2.5% by FY27

Mumbai: The Reserve Bank of India’s stress test has predicted that bad loans of the top 46 banks could rise marginally by March 2027, while their capital buffers would remain adequate even under severe stress.

The Reserve Bank of India projected that the aggregate gross non-performing assets (GNPA) ratio of these banks may rise from 2.3% in March 2025 to 2.5% in March 2027 under the central bank’s baseline stress scenario in the banking system, according to RBI’s Financial Stability Report released on Monday.

The RBI did not provide the break-up of stress impact on public sector banks compared with their private peers, deviating from the earlier versions of the half-yearly report.

The regulator conducts stress tests to assess the banking system’s resilience to various types of shocks, including macroeconomic, liquidity or market risk, and credit concentration. The tests project key ratios of banks under three scenarios: a baseline and two adverse scenarios over a two-year horizon.

The baseline scenario is derived from the forecasted path of macroeconomic variables, while the two adverse scenarios simulate hypothetically stringent stress.

The report said the GNPA ratio may rise to 5.6% under the first adverse scenario and 5.3% under the second adverse stress scenario.

The first one is the ‘geopolitical risk scenario’, which assumes a volatile global environment with heightened geopolitical risks and escalation of global financial market volatility and supply chain disruptions leading to higher domestic inflation and tighter monetary policy.

The second adverse scenario assumes a synchronised sharp growth slowdown in key global economies and spillovers through trade and financial channels, denting domestic GDP growth and leading to easier monetary policy to support growth.

Adequate capital buffers

The stress tests project that the aggregate capital adequacy or capital to risk-weighted assets ratio (CRAR) of 46 major banks will marginally dip to 17% by March 2027 from 17.2% in March 2025 under the baseline scenario. This ratio may dip to 14.2% under adverse scenario one and to 14.6% under adverse scenario two. It indicates that none of the banks would fall short of the regulatory minimum requirement of 9% even under severe stress.

Under the baseline scenario, banks’ common equity tier-I capital is seen rising from 14.6% to 15.2% by March 2027. On the other hand, it falls to 12.5% under the first adverse scenario and to 12.9% under the second one—with no bank breaching the 5.5% regulatory requirement.

An analysis of the credit concentration risk, which factors in top individual borrowers according to their standard exposures, showed that in the extreme scenario of the top three individual borrowers of respective banks defaulting, system-level CRAR would decline by 90 basis points, and no bank would see the CRAR drop below 9%. However, four banks would experience a fall of more than two percentage points in their CRARs.

Under the extreme scenario of the top three group borrowers in the standard category failing to repay, the system-level CRAR would decline by 130 bps. While no bank would witness a drop below the regulatory minimum of 9%, system-level CRAR would decline by 10 bps in the scenario of the top three individual stressed borrowers of respective banks failing to repay.

The bottom-up stress test for liquidity risk revealed thatliquid assets ratios of all banks would remain positive under alternate shock scenarios, emphasising the adequacy of their high-quality liquid assets (HQLAs) to withstand liquidity pressure from sudden and unexpected withdrawal of deposits. Under the scenarios of a 10% deposit runoff in one to two days, the average liquid assets ratio of the banks would drop from 23% to 16.2%; in the case of a 3% deposit run-off for five consecutive days, the ratio would drop to 12.5%.

Contagion impact

A contagion analysis of the banking network at the end of March 2025 indicated that the hypothetical failure of “the lender with the maximum capacity to cause contagion losses” would cause a solvency loss of 3.4% oftotal tier-I capital, and a liquidity loss of 0.3% of total HQLA of the banking system.

Contagion analysis uses network technology to estimate the systemic importance of different financial institutions and the impact of a failure of a bank on the financial system, depending on its interconnections with the rest of the banking system.

The failure of an NBFC or a housing finance company (HFC) could also create a solvency shock for its lenders, which can spread through contagion, given that NBFCs and HFCs are among the largest borrowers of funds from the financial system—a large part of which comes from banks.

As of March 2025, the hypothetical failure of the NBFC with the maximum capacity to cause solvency losses to the banking system could knock off 2.9% of a bank’s total tier-1 capital, but would not lead to the failure of any bank, the report said.

Similarly, the hypothetical failure of the biggest HFC would result in a hit of 3.7% to the bank’s total Tier-1 capital but without the failure of any other bank.

NBFCs’ resilience

The RBI conducted a system-level stress test on 158 NBFCs over a one-year horizon to assess the sector’s resilience to credit risk shocks. The baseline scenario was based on assumptions of business as usual, whereas the medium and severe risk scenarios were derived by applying 1 standard deviation (SD) and 2 SD shocks, respectively, to NBFCs’ GNPA ratio.

Under the baseline scenario, the system level GNPA ratio of the sample NBFCs is seen rising from 2.9% in March 2025 to 3.3% in March 2026, and the aggregate CRAR dipping from 23.4% to 21.4%.

“Under the baseline scenario, 10 NBFCs (all in the middle layer) having a share of 2.1% of total advances of all NBFCs (upper and middle layer) may breach the regulatory minimum capital requirement of 15%,” the report said.

Under the medium and severe risk scenarios, income loss and additional provision requirements may further reduce the CRAR by an additional 80 bps and 100 bps, respectively, compared with the baseline scenario. Under the high-risk scenario, 15 NBFCs (all in the middle layer), having a share of 3.7% of the total advances of all NBFCs, may not be able to meet the regulatory minimum CRAR, it said.