The Reserve Bank of India's Financial Stability Report (FSR) 2026 reveals that funding is emerging as a key challenge for the banking system, even as resilience remains intact. According to the report, banks' liability profile is shifting from low-cost current and savings account (CASA) deposits to higher-cost term deposits and CDs (Certificate of Deposits), pushing up the marginal cost of funds. This shift reflects changing investment preferences of savers towards higher-yielding equities and mutual funds, altering the composition of bank deposits that attract higher run-offs. The report notes that strong capital inflows could reduce funding strains spurred by a larger current account deficit, though funding continues to be a major obstacle despite the banking sector's resilience. Additionally, the RBI warns that growing bank exposure to State Government Securities (SGS) could strengthen linkages between State finances and bank balance sheets, warranting close monitoring of fiscal risks at the sub-national level.
In FY26, term deposits accounted for 60.8% of banks' incremental deposits, up from 58.2% in FY25, while CASA deposits dropped to 33.4% from 40.2% in the previous year. CDs increased to 5.8% from 1.6% during the same period. The report notes that the inverse relationship between CASA deposits' share and interest rate cycle appears to have weakened, with banks' deposit franchise getting affected by falling convenience yields on deposits. This weakening relationship could weigh on bank profitability as competition for household savings intensifies. The RBI also highlights that a sustained preference for higher-yielding government securities could influence the allocation of greater bank resources towards statutory liquidity ratio-eligible investments, which could constrict credit flow to the private sector.
The RBI's Financial Stability Report (FSR) 2026 reveals that 44 open-ended debt schemes with total assets under management of ₹3.18 lakh crore breached prescribed stress-test thresholds in March 2026. According to the report, this represents an increase from 43 schemes managing ₹2.25 lakh crore that breached limits in April 2025. The RBI noted that all affected funds have either rectified the breaches or initiated remedial measures within the prescribed timeline, demonstrating the sector's ability to manage risks proactively. However, the report also highlighted that certain mutual funds in debt schemes fell short of minimal liquidity standards in March, though these violations were promptly fixed. As per Mint, the central bank reports no immediate concerns as all affected mutual funds have either cured the breach or reported initiation of remedial action and are expected to complete the same within the prescribed timeframe.
The RBI's stress tests for scheduled commercial banks indicate that under the baseline scenario, gross non-performing asset ratio might reach 1.9% by March 2028, while banks' gross NPAs could increase to 3.8-4.1% by March 2028 if macroeconomic conditions worsen. The assessment was conducted against a global context of geopolitical uncertainty, tighter financial conditions, and recurrent shocks. According to the RBI, as compared to other crises, the stress on the domestic financial sector was still comparatively mild. The report also highlighted 'stress areas' in the non-bank financial industry, with the RBI's stress test for NBFCs predicting gross NPAs at 2.8% by March 2027 and aggregate capital ratio at 20.8% by March 2027. Under severe credit stress tests, 15 NBFCs might not meet capital standards.
The FSR assessment for 2026 suggests that while stress-test breaches increased in scale, mutual funds remain operationally resilient with effective risk-management mechanisms in place. The banking system faces funding challenges as credit growth continues to drive banks to run down excess SLR investments, resulting in declining LCR buffers. However, recent measures to boost capital flows are expected to ease funding pressures by improving access to less-costly rupee liquidity. Despite external challenges, the RBI reported that data indicated growth was steady in the first quarter of FY27. The central bank noted that India's macroeconomic foundations served as a cushion against outside shocks, though it cautioned that frequent external shocks might tighten financial conditions and impact the macroeconomic outlook. The RBI's findings indicate that India's financial system remained resilient despite global uncertainty, supported by strong macroeconomic fundamentals and robust bank and non-bank balance sheets with adequate capital and liquidity buffers.
