A Clean Baseline and a Stress Test: How to Read the RBI's Biannual Risk Report

The Headline Numbers

The Reserve Bank of India publishes a Financial Stability Report twice a year, assessing risks to the financial system and testing how banks would cope with shocks. The June 2026 edition was covered by PSU Watch on 30 June. We read that article, not the report, and the figures below are as the article reported them.

• Banks' gross non-performing assets were 1.8% of advances in March 2026, which the article described as a multi-decadal low. In the baseline scenario for 46 banks the ratio "may edge up from 1.8 per cent in March 2026 to 1.9 per cent by March 2028". • Stress scenarios: gross NPAs could reach 3.8% or 4.1%, depending on the severity of the adverse scenario. • Slippage ratio, the rate at which fresh bad loans arise, fell over four years to 1.2% in FY2025-26. • NBFCs: gross NPAs of 2.4% across 174 major entities in March 2026, with a baseline stress test projecting 2.8% by March 2027. • Urban cooperative banks: gross NPAs fell to 5.2%. Under interest-rate shocks, none of the tier-1 or tier-4 urban cooperative banks breached the regulatory capital requirement.

What a Stress Test Is & Our Arithmetic

A stress test applies hypothetical shocks, such as a sharp slowdown in growth or a rise in interest rates, to banks' balance sheets using the central bank's models to estimate losses and capital. It is not a forecast. The baseline scenario assumes continuing conditions; the adverse scenarios assume worse. The range between 1.9% in the baseline and 4.1% at the worst tells you the size of the shock the system could absorb in the models, not the probability of it happening.

Our arithmetic: The adverse scenarios are about twice as high as the baseline: 3.8 / 1.9 = 2.0 and 4.1 / 1.9 = 2.16. We do not compare these with past peaks, because the article did not give them and we have not checked them.

“A stress scenario is not a forecast. It measures the size of the shock, not its probability.”

The Risks the Report Named

According to the article, the report flagged three. First, funding: savers are moving towards equities and mutual funds, and banks are shifting from low-cost current and savings deposits to costlier term deposits and certificates of deposit, raising banks' marginal cost of funds. Second, cyber: the RBI called AI-enabled cyberattacks the "most important near-term challenge" for banks. Third, the report cited headwinds from the West Asia conflict.

Why the Funding Point Matters & What Is Omitted

Why the funding point matters: A bank's profitability depends on the gap between what it earns on loans and what it pays for deposits. If deposits cost more, that gap narrows unless loan rates rise or costs fall. The October rate rise, discussed in our Real Estate package, is part of the same story. We make no claim about bank profits from the article, which did not cover them.

What the article does not cover: It did not give capital adequacy ratios or provision coverage ratios. These matter because low bad loans are only reassuring if banks have enough capital and provisions to absorb the stress scenarios. A reader who wants to judge resilience needs those figures from the report.

Questions for the Report & Reading a Stability Report

Questions for the report: our list: 1. What are the capital ratios in the baseline and adverse scenarios? 2. Which sectors drive the stress, and which borrowers? 3. How concentrated are the banks that fall short in stress? 4. How were the scenarios calibrated, and are they harsher than past downturns? 5. What data support the claim about the shift of savings to equities?

How to cite it: Name the report, the edition and the date, and the page. Distinguish the baseline from the stress scenarios, and say whether the figures cover banks, NBFCs or cooperatives. Do not describe a stress outcome as a projection of what will happen.

A financial stability report is cautionary by design. Its job is to identify what could go wrong, so its pages are weighted towards risks even when current conditions are good. A reader should hold two ideas together: asset quality is at a multi-decade best by the report's own account, and the central bank is still naming funding, cyber and geopolitical risks. Neither cancels the other. The useful habit is to track the named risks over successive editions and see which ones recur.