Financial system stable despite weakening economy: RBI

India's financial system remains stable even after economic growth plummeted to a six-year low, the Reserve Bank of India (RBI) said on Friday.

"Reviving the twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge going forward," the central bank said in its bi-annual Financial Stability Report (FSR) released on Dec. 27.

Lenders are struggling as credit demand has remained subdued due to overall sluggishness in the economy. Even though the share of bad loans in the banking sector has declined, further improvement by banks is required, added the RBI.

State-owned public sector banks need to build stronger buffers to absorb any disproportionate operational losses, while private lenders need to focus on corporate governance, the RBI said.

The country's shadow banking sector has been struggling since last year after the collapse of IL&FS, a major infrastructure lender. This has also impacted banks.

"Failure of any Non-Banking Financial Companies or Housing Finance Companies will act as a solvency shock to its lenders," said the report.

Faultlines in over 1,500 urban co-operative banks were exposed after a scam at Punjab and Maharashtra Co-operative Bank (PMC). The central bank has taken steps to improve governance at these banks as their performance deteriorated significantly between March and September 2019.

PMC used more than 21,000 fictitious accounts to hide loans it made to one realty company which had led to a loss of at least 43.55 billion Indian rupees ($610 million).

Even now loan-related frauds continue to dominate by constituting 90% of all frauds reported in the financial year 2018-19 by value, said the RBI.