A police officer walks past the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai
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FRANCIS MASCARENHAS
The Reserve Bank of India (RBI) is planning to strengthen liquidity stress tests of Scheduled Commercial Banks (SCBs) by developing a cash flow analysis process to ensure they remain resilient during episodes of stress.
The cash flow analysis process would evaluate the potential impact of extreme but plausible scenarios on a bank’s liquidity position, ensuring it can meet obligations even during crises, according to the central bank’s latest annual report.
This would provide forward-looking perspective and assess the stability of banks’ liquidity positions under adverse conditions.
The RBI emphasised that by identifying vulnerabilities and ensuring adequate liquidity buffers, stress testing would aid in ensuring resilience of banks, protect depositor interest and prevent systemic risks.
To enhance the stress testing framework further, a liquidity stress test framework for NBFCs (non-banking finance companies) will be developed in-house by the RBI.
Further, the central bank will explore extending the macro stress test to large and mid-sized banks in the UCBs (urban cooperative banks).
In addition to extending the stress testing framework, the RBI also plans to assess the impact of climate transition risk on major carbon-intensive sectors and its impact on balance sheets of banks having exposure to emission intensive sectors;
The central bank will also develop a ‘Growth-at-Risk’ model for understanding how financial conditions and the level of financial vulnerabilities contribute to the possibility of future episodes of weak economic growth. It will do this by linking current macrofinancial conditions to the distribution of future growth.
The RBI plans to develop a framework for carrying out liquidity risk stress testing of its market portfolio by building various scenarios based on analysis of historical events of market liquidity stress. The same will be integrated with the framework for stress testing for interest rate and exchange rate risk.
Climate risk
The central bank is considering issuing prudential guidelines on climate risk for banks. This includes issuance of final guidelines on disclosure of climate related financial risks and guidance on climate scenario analysis and stress testing.
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Published on May 29, 2025
