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Indian banks' capital position remains robust, supported by high profits, and their asset quality should further improve through March next year, a report released by the central bank on Thursday showed.

Banks' bad loans, or gross non-performing asset ratio, slipped to a multi-year low of 2.8% in March 2024 from 3.2% in September last year, the Financial Stability Report showed.

The ratio may decline to 2.5% by March 2025 under the so-called baseline scenario, the report said.

Meanwhile, gross bad loans of non-bank lenders also continued to ease, falling to 4% in March from 4.6% in September 2023.

The Financial Stability Report report, published bi-annually by the Reserve Bank of India, includes contributions from all financial sector regulators.

Indian banks are well capitalised and will be able to comply with the minimum capital requirement of 9% even under a severe stress scenario, in which the gross bad loan ratio may rise to 3.4%, according to the report.

"The results of stress tests demonstrate that capital levels of banks and non-banking financial companies (NBFCs) will remain above the regulatory minimum even under severe stress scenarios," Reserve Bank of India Governor Shaktikanta Das said.

The highest priority must be assigned to governance, Das reiterated, stressing that strong governance is at the core of resilience of stakeholders in the financial system.

Deposit mobilisation by banks is gathering pace, and loans have continued to expand on the back of robust demand conditions and outlook, the report said.

The report also warned that a rapid rise in derivative trading volumes in India could pose several challenges.