Understanding the Current Scenario

As of September 2024, Indian banks have maintained their gross non-performing assets (NPAs) at a 12-year low of 2.6% of total assets. However, the Reserve Bank of India (RBI) forecasts a potential rise to 3% by March 2026 under baseline conditions, with more severe scenarios predicting even higher figures.

RBI's Stress Test Insights

The RBI's bi-annual financial stability report highlights a concerning trend in the sharp increase of write-offs, particularly among private sector banks, which may indicate deteriorating asset quality. The report outlines various scenarios, including adverse conditions where NPAs could escalate to 5.3%, signaling significant credit risk.

Impact on Different Banking Sectors

Public sector banks are projected to see a substantial rise in GNPA ratios, while private and foreign banks may experience a more moderate increase. The report also points out vulnerabilities in the microfinance and consumer credit segments, alongside risks from external spillovers and the emerging trend of tokenisation in the financial sector.

Global Financial Risks

Tokenisation, though in its nascent stages, presents a new set of challenges by potentially increasing interconnectedness between traditional financial systems and decentralised platforms, including crypto-assets. This could have far-reaching implications for financial stability.