Resilience of Indian Banking Sector:A Macro Stress Testing of Selected Banks

The Indian banking sector is severely suffering with the problem of growing Non Performing Assets (NPAs) of banks. This unwanted growth has a direct impact on the profitability and liquidity of banks; it also poses threat on quality of assets and survival of banks. The economic growth scenario of the country needs a sound and resilient banking industry to support it. In this regard the present paper is an attempt to examine the health of banking industry with reference to the position of Capital Adequacy Ratio (CAR) and ability of banks to absorb various shocks. The paper provides an insight on the position of Capital Adequacy Ratio (CAR) of the top 5 public sector banks and top 3 private sector banks. Stress test sensitivity analysis has been used to analyze the CAR position of the banks considered for the study. A stress test is an analysis conducted under unfavorable economic scenarios which is designed to determine whether a bank has enough capital to withstand the impact of adverse developments. These tests are meant to detect weak spots in the banking system at an early stage, so that preventive action can be taken by the banks and regulators. Under the stress test sensitivity analysis of capital adequacy ratio is to be studied by imparting shocks to the NPA levels.