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Informist, Thursday, May 29, 2025

MUMBAI – Banks need to address trading and banking book risks, given the dynamic nature of interest rates, the Reserve Bank of India said. Banks need to be aware of the trading risks and banking risks, especially in light of moderation in their net interest margins, the RBI said in its annual report for 2024-25 (Apr-Mar). 

"The Indian banking sector has been resilient, although heightened global uncertainties underscore the importance of proactive risk management," the report said.

Going ahead, a revival in private investment can potentially drive increased demand for bank credit, the report said. Although deposit growth trailed credit growth, the gap narrowed during 2024-25 (Apr-Mar), the report said, adding that double-digit growth in bank deposits and credit was sustained in FY25. Bank credit expansion was largely broad-based, led by retail, services and agriculture sectors. Currency demand growth remained moderate in FY25, with increasing public preference for digital modes of payment, the RBI said. 

Even with the rise in deposit rates of banks, which have been led mainly by bulk deposits, the marginal cost of funds-based lending rate has risen with a lag, the RBI said. The share of external benchmark-linked loans increased further in FY25, leading to a fall in MCLR-linked loans during the year. The share of external benchmark-linked loans in total outstanding floating rate loans of state-owned banks was at 44.6%, whereas it was 85.9% for private banks at end-December 2024. 

The RBI will do a comprehensive review of all non-fund-based contingent facilities issued by banks in FY26. Non-fund-based facilities are credit lines offered by banks that don't involve a direct outflow of funds. Instead, they provide commitments or guarantees that could potentially lead to a future payment liability if a customer fails to fulfil their obligations. 

The regulator aims to develop a cash flow analysis to ensure banks remain resilient during episodes of stress, the report said. "The process would evaluate the potential impact of extreme but plausible scenarios on a bank's liquidity position, ensuring it can meet obligations even during crises. It would provide a forward-looking perspective and assess the stability of banks' liquidity positions under adverse conditions," the report said. 

In the current financial year, the RBI will also issue prudential guidelines on climate risk for banks. "This includes issuance of final guidelines on disclosure of climate-related financial risks and guidance on climate scenario analysis and stress testing," the regulator said.  End

Reported by Kabir Sharma

Edited by Saji George Titus

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