RBI's financial stability report sees limited risk to banking sector

The banking sector in the country remains broadly healthy as banks remain well capitalised in terms of regulatory capital adequacy ratios, with higher core capital and sustainable financial leverage, the Reserve Bank of India (RBI) said in its Financial Stability Report published today.

The report said stress tests for credit and market risk reveal banks' ability to withstand unexpected levels of stress.

Additionally, the report said, credit quality continues to remain robust. The share of low cost current and savings account deposits in total deposits is high. Banks are required to hold a minimum percentage of their liabilities in risk free government securities.

Stress tests indicate that the banking sector is comfortably resilient and, even if, in a worst case scenario, it is assumed that all restructured standard advances were to become NPAs, the stress would not be significant, the report said.

While the resilience of the commercial banks to credit and interest rate shocks has improved over time, the liquidity scenario analysis shows some potential risk, RBI pointed out.

The margins of banks may face pressure from the MTM impact on the investment portfolio, increased provisioning requirement and calculation of interest on savings bank deposits on a daily basis from 1 April  2010, the report pointed out.