The RBI said large borrowers registered significant deterioration in their asset quality.

India's banking sector continues to be under pressure as the asset quality of scheduled commercial banks deteriorated in the March to September 2016 period.The gross non-performing advances or bad loans ratio of banks 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 in the same period, according to the Financial Stability Report (FSR) issued by the RBI.The FSR report said that risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity. "The large borrowers registered significant deterioration in their asset quality," mentioned the report.Under assumed baseline macro scenario, there could be a further increase in the bad loans ratio in the coming months, indicated the report."The PSBs (public sector banks) may record the highest gross non-performing advances ratio and lowest capital to risk -weighted asset ratio among bank groups," the report said."While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India's financial system," said RBI Governor Urjit Patel in the foreword of the report.Mr Patel also said domestic economic conditions remained "stable", adding that India had seen "significant moderation" in inflation, although he also noted growth momentum "has slackened" recently.

The RBI governor backed the demonetisation of high currency notes by the government, saying it would "impart far reaching changes", including in boosting digital payments, while acknowledging "the short-term disruptions in certain segments of the economy and public hardship". ((With inputs from Reuters)