MUMBAI: Despite the rising tide of global headwinds, the Indian economy continues to expand at a robust pace, supported by strong domestic demand, record low inflation and healthy bank balance sheets, even as risks from unsecured lending, fintech exposure, external uncertainties and stablecoins persist, said the Reserve Bank in its Financial Stability Report.
The financial system remains “robust and resilient”, aided by strong balance sheets, easy financial conditions and low financial market volatility, said the report, which however has also cautioned that geopolitical and trade-related uncertainties pose near-term risks to financial stability.
Underlining that the economic outlook remains positive, the report noted that real GDP growth surprised on the upside in the first two quarters of FY26, registering 7.8% in Q1 and 8.2% in Q2, taking the first half clip at 8%.
Growth was supported by strong private consumption and public investment, the report said, adding that its growth outlook remains positive, aided by low inflation, easy financial conditions, an above-normal monsoon, tax reforms and the continued expansion of digital public infrastructure.
On the banking side, the central bank said the asset quality has improved the best in many decades with gross bad loan ratio falling to a low of 2.1% in the September quarter from 2.5% in the year ago period while net NPAs are under 50 bps for the first time in many decades and projected to improve further to 1.9% by March 2027 under the central bank’s baseline scenario.
Under adverse stress scenarios, the GNPA ratio could rise to 3.2% and 4.2%, the RBI said. Overall the financial health of banks remains sound, with strong capital and liquidity buffers, improved asset quality and robust profitability, the report said, adding banks' capital buffers also remain adequate.
From a capital perspective, the capital to risk-weighted assets ratio (CRAR) remained strong as of September 2025, with public sector banks at 16% and private sector banks at 18.1%. The aggregate CRAR of 46 major scheduled commercial banks may decline from 17.1% in September 2025 to 16.8% by March 2027 under the baseline scenario. Under hypothetical adverse scenarios, it may fall to 14.5% and 14.1%.
Stress tests indicated relatively higher depletion in the capital of public sector banks compared with private and foreign banks. Six banks, accounting for 15% of total banking assets, would breach the regulatory minimum CRAR under a severe shock.
However, the report has flagged the rise in the unsecured loan books of banks which of late have been driving retail slippages. More than half of retail loan slippages are coming from unsecured products such as personal loans and credit cards, the RBI said.
Unsecured loans accounted for 53.1% of total retail loan slippages. Among bank groups, private sector lenders recorded a higher share of fresh slippages.
Unsecured loans contributed nearly 76% of slippages for private banks, compared to 15.9% for public sector banks. At an aggregate level, the GNPA ratio for unsecured retail loans stood at 1.8%, compared to 1.1% for overall retail advances.
The report blames fintech lending for the spike in stress in the unsecured books. Unsecured loans account for more than 70% of fintechs’ total loan books, with over half of such loans extended to borrowers under 35 years of age.
Between September 2024 and September 2025, fintech lending grew 36.1%, driven largely by personal loans, the report said.
In a special feature of the report, the RBI also warned that widespread adoption of stablecoins could pose significant risks to the nation’s monetary sovereignty and financial stability.
The central bank said, “Foreign currency-denominated stablecoins could erode monetary control, weaken monetary policy transmission and complicate capital flow management, particularly for emerging economies like ours.”
It reiterated that central bank money must remain the ultimate settlement asset and said central bank digital currencies can deliver efficiency and programmability while preserving trust in money.
The RBI further cautioned that stablecoins can be volatile, vulnerable to confidence shocks and structural fragilities, and could be misused for money laundering, terrorism financing and weapons proliferation without adequate regulation.
Blaming the rupee's weakening on trade and capital flow pressures, the monetary authority said it depreciated against the dollar due to falling terms of trade, high tariffs and a slowdown in capital flows. The rupee closed 2025 as the worst Asian unit losing over 5% and closing over 90 and the third worst in the world.
Despite a broad weakening of the dollar against other major and Asian currencies, the rupee weakened as the effective US tariff rate remained higher than that of its trading partners.