RBI Reports Strong Bank Health and Growth in FY24, Warns of Interest Rate Risks

The Reserve Bank of India (RBI) released its annual report on Thursday, highlighting that banks and Non-Banking Financial Companies (NBFCs) have maintained strong capital and asset quality. This stability has supported the growth in bank credit and domestic activity in the financial year 2024 (FY24).

The RBI emphasized the effectiveness of pre-emptive regulatory measures aimed at controlling excessive consumer lending and bank lending to NBFCs, as well as investments in alternate investment funds (AIFs). These measures are expected to prevent potential stress in the balance sheets of financial intermediaries and support financial stability.

The report raised concerns about the risks associated with trading and banking books due to the changing nature of interest rate risk. “While domestic banks and NBFCs have shown resilience amid global uncertainties, recent events highlight the need for vigilant risk management. Considering the dynamic nature of interest rate risk, banks may need to address both trading and banking book risks, especially with moderating net interest margins (NIM),” the report stated.

The RBI also stressed the importance of diversifying deposit sources to reduce reliance on bulk deposits, which are highly sensitive to interest rate changes. Furthermore, it noted the need to address climate-related financial risks and the resulting micro and macro-prudential concerns. A strong framework is necessary to identify, assess, and manage these risks.

In response to these challenges, the RBI aims to make its regulations more principle-based, focusing on activities and the scale of systemic risk rather than specific entities. This approach is intended to enhance financial stability and resilience in the face of evolving risks.