RBI vows to secure financial stability amid emerging headwinds

Indian financial regulators are digging in to safeguard financial stability amid global headwinds and emerging challenges from technological disruptions, cyber risks and climate change, while crafting a system resilient to shocks and primed for growth, Reserve Bank of India governor Shaktikanta Das said.

RBI remains alert and is committed to act early and decisively to prevent any build-up of risks, Das wrote in the foreword to RBI’s half-yearly Financial Stability Report (FSR).

“Our recent macroprudential measures to curb lenders’ exuberance towards certain segments of retail loans underline our commitment to preserve financial stability

without compromising availability of funds for productive requirements of the economy,” Das wrote.

Looking to curb risks in consumer lending and apply brakes on the rapid growth of such loans, RBI last month raised the risk weights on consumption loans, credit card exposures, and loans to non-bank finance companies (NBFCs) by 25 percentage points each.

Analysts had earlier cautioned that rising unsecured credit risk could affect lenders’ capital adequacy ratios, which are crucial indicators of a bank’s ability to absorb losses and maintain solvency in tough financial situations.

RBI data showed bank exposure to personal loans rose to ₹48.26 trillion in September, up from ₹37.02 trillion in the year-ago period.

In the July-September quarter, leading Indian banks, including HDFC Bank, ICICI Bank, and Kotak Mahindra Bank, saw unsecured loan portfolios expand by up to 30%.

Last month, Das had flagged the contagion risk posed by NBFCs due to their extensive borrowing relationships with multiple banks, adding that lenders and NBFCs need to strengthen their risk management practices and build additional buffers to face the situation if the business cycle turns adverse.

“The global economy and the financial system, despite displaying resilience in the face of unprecedented monetary tightening and acute banking system stress, are facing difficult challenges,” RBI cautioned in the FSR, adding that multiple geopolitical conflicts, “growing geo-economic fragmentation, elevated debt levels, and uncertainty about the global economic outlook are some of the key vulnerabilities that pose threat to financial stability. Emerging market economies remain vulnerable to global spillovers and volatile capital flows.”

“Against this challenging global backdrop, the Indian economy exhibits macroeconomic resilience, with a robust financial system that is supporting its growth dynamics,” RBI said.

The central bank pointed to four problem areas in consumer credit, despite lower levels of delinquencies in the segment

First, it noted an increase in the risk profiling of consumer loans and personal loans, with downgrades exceeding upgrades. Second, the relatively high vintage delinquency of personal loans at 8.2% indicates declining standards of underwriting, RBI said.

“Third, 42.7% of customers availing consumption loans already had three live loans at the time of origination and 30.4% of customers have availed of more than three loans in the past six months. Fourth, 7.3% of customers availing a personal loan below ₹50,000 had at least one overdue personal loan,” it added.

Systemically important banks

In a separate report, RBI maintained the status of State Bank of India (SBI), HDFC Bank, and ICICI Bank as domestic systemically important banks (D-SIBs).

“While ICICI Bank retains its previous classification, both SBI and HDFC Bank have moved to higher buckets, with SBI shifting from bucket 3 to bucket 4 and HDFC Bank moving from bucket 1 to bucket 2,” RBI said.

RBI, since 2015, has been classifying certain banks as D-SIBs and placing them into five different buckets. These classifications are made based on the size of a bank as a percentage of the national gross domestic product. The higher the bucket number, the more capital the bank is required to maintain

Effective 1 April 2025, SBI and HDFC Bank will be subject to higher D-SIB buffer requirements due to their upgrades.

RBI systemic risk survey

RBI also published the findings of the 25th round of the its Systemic Risk Survey (SRS) conducted in November that included views of experts, including market participants, on major risks faced by the Indian financial system.

Major drivers of global risks, such as, global growth, funding risk, banking turmoil and risk emanating from monetary tightening in advanced economies were perceived to have moderated but the risk perception on commodity price has gone up.

Increase in risk perception attributable to domestic inflation, current account deficit, capital flows, household savings and climate change contributed to uptick in macroeconomic risks, even as domestic growth conditions, consumption demand and corporate sector prospects provided more comfort, the survey said.

Going forward, respondents’ perception of risks to financial stability included tightening of global financial conditions; rise in oil prices; reversal of capital flows; rise in geopolitical risks; global growth slowdown; and increase in climate risks.