The Financial Stability Board, in its October review this year, rated India as being non-compliant with its standard for public backstop funding in bank resolution. This finding is not a verdict on India’s overall financial capacity to absorb losses or provide liquidity, but concerns emergency funding for banks undergoing resolution. The concern is whether clear legal arrangements and tested procedures are in place to mobilise funding at the speed and scale needed to sustain confidence in a crisis, and raises uncomfortable questions about preparations before trouble arrives.

For the review, the Board had two considerations: (i) a sound estimate of the potential shortfalls is fundamental to effective contingency planning; (ii) what should the preparations look like within India’s ecosystem.

Estimating the Shortfall
The real test of Internal Capital Adequacy Assessment Process (ICAAP) and Interest Rate Risk in the Banking Book (IRRBB) implementation lies in the evidence they produce. Banks and NBFCs must generate reliable risk parameters and results, report them consistently to the RBI, and ensure that the underlying methods and assumptions can withstand any scrutiny. Those outputs must also be comparable, timely and usable for system-wide analysis. The implementation of these processes needs to be judged on how well they work in practice. That also goes for expected credit loss (ECL) for the NBFC sector at the moment, and banks from next year.

Preparations for crisis management need to be based on credible measurement because the approach needs to be fit for the risk it addresses; credit stress tests assess losses and capital resilience while liquidity tests assess whether obligations can be paid when due.

These are distinct exercises, but deteriorating assets can undermine confidence and funding access. The same economic shock can weaken borrowers’ ability to repay, reduce banks’ cash inflows and erode collateral values. Deteriorating asset quality can also unsettle depositors and lenders, prompting withdrawals and restricting access to funding.

The US Federal Reserve’s supervisory models use detailed borrower, loan and portfolio information to project defaults, losses and exposures under stress. European exercises, coordinated by the European Banking Authority with ECB participation, similarly translate scenarios into credit risk parameters using banks’ models. The methods differ, but both give bank-portfolio and composition an explicit role. Overall, these approaches make assessments using borrower level PD.

RBI’s Financial Stability Reports provide scenario analysis. The methodological question is how those scenarios are drawn from the underlying exposures. The December 2025 report detailed that estimates are informed by bank-level slippage forecasts feeding the gross non-performing asset (GNPA) projections. This still does not establish borrower-level risk measurement.

Slippage records the amount entering non-performing status relative to opening performing advances. It is not an individual borrower’s default probability. Two banks with similar historical slippage can hold portfolios with very different borrower PDs, collateral and undrawn commitments. GNPA does not have a fixed relationship with PD. GNPA is affected by fresh defaults, recoveries, upgrades and write-offs; its ratio also depends on lending growth. Forecasting each bank separately for slippage, therefore, does not automatically capture the risks.

A separate sensitivity exercise can take stock of the full portfolio of GNPA ratios. Concentration tests introduce borrower detail through assumed failures of large exposures, while sectoral tests test banks’ sectoral GNPA ratios. Given the basic measurement approach, these exercises provide useful diagnostics, but stop short of establishing granular, scenario-dependent default modelling.

Again, while interest rate risk analysis uses earnings and duration gaps, it does not make use of scenario-dependent modelling of loan prepayments, deposit withdrawals or embedded options. Such behaviour matters because stressed cash flows can diverge from contractual schedules.

RBI also tests deposit runs and drawdowns of committed facilities; the challenge is to connect these liquidity shocks more closely with evolving asset quality and individual borrower behaviour.

Preparedness
The need to prepare for the worst matters. Preparation cannot prevent every crisis, but it can prevent hesitation from making one worse. When market or financial system confidence faces haemorrhage, hours matter. The system should be empowered with the knowledge of who can act, which resources are available, what collateral qualifies and how quickly money can move.

Central counterparties offer a useful lesson. International clearing reforms established prefunded resources, default waterfalls and arrangements for meeting liquidity needs. The waterfall allocates default losses; separate liquidity arrangements help ensure payments arrive on time. Their design recognises that surviving a member’s failure requires resources and procedures arranged beforehand. A promise to find money later is weaker than an executable plan.

Banks face similar expectations: stress their funding, maintain liquid assets and prepare contingency plans. Authorities should apply the same discipline to their own crisis arrangements as they expect for their banks. Prudence is best reinforced by example.

Credible arrangements for emergency funding should connect borrower deterioration, deposit behaviour, collateral availability and market access, then rehearse the resulting operational demands. That means identifying usable resources, specifying decision rights, testing execution and protecting government finances through clear recovery arrangements.

Regulators rightly demand that banks plan for a bad day. The public financial safety net deserves the same practical discipline.