Banks in India, particularly state-run ones, continue to face significant levels of stress owing to bad loans, the RBI said on Thurdsay in its December 2016 Financial Stability Report (FSR).

"The banking stability indicator (BSI) shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity," the Reserve Bank of India said in a statement, releasing the FSR.

"The business growth of scheduled commercial banks (SCBs) remained subdued with public sector banks (PSBs) continuing to lag behind their private sector peers. System level profit after tax (PAT) contracted on y-o-y basis in the first half of 2016-17," it said. 

The central bank said the asset quality of banks deteriorated further between March and September 2016.

"The GNPA (gross non-performing advances) ratio of SCBs increased to 9.1 per cent in September 2016 from 7.8 per cent in March 2016, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent. The large borrowers registered significant deterioration in their asset quality," the statement said. 

"PSBs continued to record the lowest capital to risk-weighted assets ratio (CRAR) among the bank groups with negative returns on their assets," it said. 

"Overall, India's financial system remains stable although banks, particularly the public sector banks, continue to face significant levels of stress," it added.

In its report on the Indian banking sector during 2015-16, the RBI said their performance remained subdued amidst rising proportion of bad loans and consequent increase in provisioning, as well as continued slowdown in credit growth. 

"During 2015-16, scheduled commercial banks' interest earnings and non-interest incomes were adversely affected, which led to a more than 60 per cent drop in net profits for the banking sector. 

"Banks' return on assets (RoA) and return on equity (RoE) showed a substantial decline as compared to the previous year even as the public sector banks (PSBs) reported negative RoA."

Giving an overall perspective, the RBI said that though the performance of most emerging market economies was marked by severe domestic imbalances emanating from economic slowdown and downturn in credit growth coupled with rising stress in corporate and financial sectors, India stood out in terms of higher economic growth, although the banking sector was under stress primarily on account of asset quality concerns.