The RBI's Financial Stability Report, released on Tuesday, warned that stability conditions in the PSU banking sector, which started deteriorating in 2010, have worsened significantly. The central bank's stability indicator, which maps five dimensions -- soundness, asset quality, profitability, liquidity, and efficiency -- risks to the sector increased significantly during the second half of 2015-16 due to deteriorating asset quality and lower profitability. While stress tests reveal resilience, the report cautioned that the system could become vulnerable if macroeconomic conditions deteriorate sharply. Leveraged weak companies, with lower debt servicing capacity, may strain the already deteriorated asset quality of loans in an adverse situation, it added. On the other hand, Moody's Investors Service cautioned that the risks of consolidation of public sector banks under the current economic circumstances could offset the potential long-term benefits. The global credit rating agency underscored that India's banking system has witnessed an increase in stressed assets since 2012, with many public sector banks (PSBs) having suffered significant deterioration in their balance sheets as demonstrated by their asset quality metrics and capitalisation profiles. "As a result, no PSB currently has the financial strength to assume a consolidator role without leading to questions regarding its own credit standing post-merger. "We analysed the hypothetical acquisition of a weak bank by several larger PSBs in the system, which pointed to a likely significant deterioration in credit metrics for the surviving entity, which underscores the current broad weakness in the system's balance sheet," Moody's said in a statement. Adding to this financial pressure, the agency said, all listed PSBs are now trading at a significant discount to their book value. This limits their ability to attract external capital to support potential acquisitions, it added.