Indian banks' bad loans, currently at multi-decadal lows, are expected to rise marginally to 1.9% by March 2028 under a baseline scenario, from 1.8% in March 2026, even as capital ratios moderate over the same period, according to the RBI's bi-annual Financial Stability Report. The macro stress test results and sensitivity analysis covering 46 select scheduled commercial banks over a two-year horizon show that capital and asset quality positions remain stable under baseline projections, but deteriorate under adverse scenarios.
Stress Test Scenarios and Projections
Under adverse scenario 1, the aggregate gross NPA ratio is projected to rise to 3.8% by March 2028, while under adverse scenario 2, it is projected to rise to 4.1%. These scenarios simulate different degrees of macroeconomic stress, testing the resilience of the banking system.
| Scenario | Gross NPA Ratio (March 2028) | Baseline CRAR (March 2028) | CET1 Ratio (March 2028) |
|---|---|---|---|
| Baseline | 1.9% | 15.6% | 13.9% |
| Adverse 1 | 3.8% | 13.3% | 11.6% |
| Adverse 2 | 4.1% | 13.0% | 11.4% |
Capital Buffers Remain Above Norms
Aggregate Capital to Risk-Weighted Assets Ratio (CRAR) fell from 17.5% in March 2026 to 15.6% by March 2028 under the baseline, and dropped to 13.3% and 13.0% under adverse scenario 1 and 2 respectively. Common Equity Tier 1 (CET1) slid from 15.2% to 13.9% under baseline and further to 11.6% and 11.4% under the two adverse stress scenarios. The report stated that no bank would breach the minimum regulatory CRAR requirement of 9% under baseline projections by March 2028.
"Strong growth, low inflation, healthy balance sheets of financial and non-financial firms, and ample buffers have helped preserve macro-financial stability," RBI governor Sanjay Malhotra said in a foreword to the report.
Implications for Trade Finance and Corporate Lending
For trade finance professionals and corporate treasurers, the stress test results offer reassurance on the availability of credit, including trade credit, under baseline conditions. Capital buffers remaining above norms even in adverse scenarios suggest that banks have capacity to absorb losses without a sharp contraction in lending. However, the projected rise in NPAs — especially the jump to 3.8-4.1% under stress — signals a potential tightening of credit standards if economic conditions deteriorate. This could increase the cost of capital for trade finance, as banks may reprice risk premiums on working capital facilities and letters of credit.
The RBI's flagging of gold loan and private credit risks implies heightened supervisory scrutiny on these segments. Financial institutions exposed to gold loan portfolios or private credit may face higher capital charges or more conservative provisioning, which could indirectly affect the pricing of trade-related loans. Finance executives should monitor these developments closely, as any regulatory tightening could ripple into borrowing costs for importers and exporters.
Overall, the resilience demonstrated by Indian banks supports continued access to trade finance in a stable macro environment, but the adverse scenario outcomes highlight the need for contingency planning in FX and liquidity management.
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