RBI report says domestic financial system resilient despite external shocks

The Reserve Bank of India (RBI) released its Financial Stability Report on Tuesday, stating that the domestic financial system remains resilient despite facing multiple external shocks. The report, prepared in collaboration with other financial sector regulators, assessed the health of banks, non-banking financial companies (NBFCs), and other financial intermediaries.

Strong capital buffers and asset quality

The report noted that scheduled commercial banks have maintained strong capital adequacy ratios, well above the regulatory minimum. Their gross non-performing asset (GNPA) ratio has declined further, reflecting sustained improvement in asset quality.

Provision coverage ratios have also increased, giving banks greater ability to absorb potential losses. The RBI said that stress tests indicate the system can withstand severe macroeconomic shocks without breaching minimum capital requirements.

NBFCs and cooperative banks show improvement

Non-banking financial companies have also seen improvement in their financial health. Their capital adequacy remains comfortable, and the sector has reported lower levels of stressed assets.

Urban cooperative banks and rural cooperative banks have shown similar trends, with many reporting improved profitability and lower non-performing assets. The RBI said the cooperative banking sector is undergoing consolidation and governance reforms.

Global headwinds and domestic resilience

The report acknowledged that the global economic environment remains challenging, with geopolitical tensions, volatile commodity prices, and tighter financial conditions in advanced economies. However, it said India's financial system is better placed to navigate these headwinds due to strong domestic fundamentals.

India's foreign exchange reserves remain adequate, and the current account deficit is manageable. The RBI said the financial sector's linkages with global markets are limited, providing a buffer against external contagion.

Regulatory measures and future outlook

The RBI has taken several regulatory measures in recent months to strengthen the financial system. These include tighter norms for NBFCs, enhanced disclosure requirements, and improved resolution frameworks for stressed assets.

The central bank also highlighted the importance of continued vigilance. It said financial institutions must remain focused on risk management, especially in areas such as credit concentration, interest rate risk, and operational resilience.

Looking ahead, the RBI said it will continue to monitor the evolving global and domestic situation. The next Financial Stability Report is expected later this year, and will provide an updated assessment of the system's health.