Don’t worry, banks have shock absorbers: RBI

MUMBAI: The Reserve Bank of India said the and financial system remain susceptible to geopolitical tensions and related shocks, even as an interim peace deal is in place. At the same time, stress tests indicate that financial institutions are well positioned to withstand adverse shocks.

In its bi-annual , the flagged concerns over customer service in the insurance sector and again cautioned that rising interconnectedness among financial institutions could act as a potential channel for contagion. The report noted that cybersecurity risks have emerged as a key financial stability concern.

The FSR assesses the performance of banks, financial institutions, mutual funds, insurance companies and clearing corporations under a baseline scenario – derived from the latest forecasts for macroeconomic variables – and adverse scenarios that assume a marked slowdown in growth and higher inflation. It measures stress arising from credit concentration risk, interest rate risk, and liquidity risk.

The report reviewed 46 banks and concluded that, under the baseline scenario, commercial banks’ gross non-performing assets could rise to 1.9%, while under severe adverse scenarios, the ratio could increase to 3.8%-4.1%. Gross NPAs stood at 1.8% as of March 2026. Similarly, the report said banks’ core equity capital could fall to 13.9% by March 2028 under the baseline scenario and to 11.6% under severe stress, compared with 15.2% as of March 2026.

In his foreword, RBI Governor said banks and financial institutions remain sound, backed by strong capital and liquidity buffers, low non-performing assets and robust credit growth. However, he added that the “risk of adverse external shocks has increased with geopolitical conflicts.”

The report said exchange rate volatility could rise if oil prices increase amid lingering supply disruptions, while a sharp correction in global equity markets – particularly in tech and AI-linked stocks – could spill over into domestic markets.

The RBI flagged customer service as one of the concerns for the insurance industry despite its overall resilience, stating that “rising policyholder grievances in general insurance segment indicates gaps in service quality.” The report said surrenders and withdrawals have risen sharply, accounting for 38.3% of total pay-outs in 2025-26, exceeding maturity benefits at 36.9%. “Persistently elevated surrender rates also signal policyholder dissatisfaction, product mis-selling, or competitive pressure from alternative financial instruments,” the RBI said.

The RBI also flagged concerns about the sector’s cost structure and rising distribution expenses. The regulator said a divergence in cost structure is evident between public and private life insurers.