Stress tests indicate banks can withstand shocks and keep capital ratios well above regulatory requirements. Non-banking financial companies (NBFCs), mutual funds and clearing corporations also showed resilience, while the insurance sector’s solvency ratio stayed above the minimum threshold. However, RBI governor Sanjay Malhotra cautioned that the longer-term outlook remains clouded.
“The outlook for 2026 and beyond is shrouded in uncertainty as the contours of policies reshaping the global economic landscape remain fluid and untested,” Malhotra said in the report’s foreword.
Despite global headwinds, India is expected to post strong growth driven by domestic consumption and investment, he said.
Private Credit’s Impact
“We recognise near-term challenges from external spillovers and continue to build strong guardrails to safeguard the economy and the financial system from potential shocks,” Malhotra said.
The report flagged risks from geopolitical tensions and trade disruptions, which could trigger exchange rate volatility, dampen trade flows, reduce corporate earnings and curb foreign investment. A sharp correction in US equities could spill over to domestic markets and tighten financial conditions, it warned. The report also expressed concern that “interconnectedness between private credit and the broader financial system is increasing,” adding to “the channels through which stress in private credit could transmit to the rest of the financial system.”
It also highlighted the complex circular financing linking large firms globally and fuelling a credit boom in the AI sector.
Macro stress tests of 46 banks projected that the capital adequacy ratio may decline to 16.8% by March 2027 from 17.1% in September 2025 under the baseline scenario. Under two adverse scenarios – one assuming a gradual slowdown and another a sharp global trade shock – it may fall to 14.5% and 14.1%, respectively. While none of the banks may breach the 9% minimum requirement, four could dip into their capital conservation buffer if no fresh capital is infused.
Bad loans
On bad loans, the stress test projected that under a hypothetical two-standard-deviation shock to non-performing assets (NPAs), the system-level gross NPA ratio could surge from 2.1% to 8.1%.
Liquidity stress tests revealed that the aggregate Liquidity Coverage Ratio (LCR) would fall from 131% to 116.8% under severe stress, with three banks failing to meet the 100% minimum requirement. LCR measures a bank’s ability to weather cash outflows for a month during times of severe stress by maintaining high-quality assets.
Stress tests on 174 NBFCs showed their aggregate capital to risk-weighted assets ratio (CRAR) dipping from 22.8% to 21.7% under baseline stress and to 20.9% under severe credit stress. GNPA ratios could rise from 2.3% to 5.4% in the worst-case scenario, with 11 NBFCs failing to meet the 15% CRAR requirement. Liquidity stress could leave up to seven NBFCs with negative mismatches exceeding 20% of outflows.
NBFC stress
The RBI warned about rising stress in NBFCs, stating that even as their GNPA ratio has declined, fresh accretions to NPAs are trending higher. “Moreover, write-offs are also growing, indicating some build-up of stress in their loan portfolio,” it said.
The RBI said banks’ asset exposures to non-bank financial intermediaries (NBFIs) are rising.