Indian banks today are bigger, better and more efficient than ever, according to the RBI. However, in its latest Financial Stability Report, the central bank warned that we may have to watch out for risks from unsecured lending, increasing exposure to financial technologies, external uncertainties, and, importantly, stablecoins. Cautioning about the dangers hidden in global markets, it noted that geopolitical and trade-related uncertainties pose near-term risks to financial stability. On the domestic front, non-bank financial intermediaries and their interconnectedness with banks need a closer scrutiny, while their exposure to smaller enterprises, which are stressed from over-leveraging, needs attention. On balance, though banks and non-bank lenders seem healthy with a good capital base, stable profits and better asset quality, much will depend on risk management, timely policy actions and coordination between lenders and the regulator.
Helpfully, banks’ asset quality has improved to the best level in several decades, with gross bad loan ratio falling to 2.1 percent during the September quarter from 2.5 percent a year before and a peak of 11.5 percent in 2017-18. Their net non-performing assets (NPAs) are projected to improve further to 1.9 percent by March 2027 in the central bank’s baseline scenario. But under adverse scenarios, gross bad loans could jump to 3.2-4.2 percent. That said, the overall financial health of banks remains sound, with strong capital and liquidity buffers, improved asset quality and robust profitability, and according to the RBI, these factors will enable banks to absorb any possible shocks.
While declining gross NPAs is heartening, the other half of the story comprising write-offs and recoveries isn’t that heart-warming. Indian banks have written off an alarming ₹8.90 lakh crore of bad loans over the last five financial years and the current year up to September 2025. Public sector banks alone have written off an aggregate loan amount of ₹6.16 lakh crore. Write-offs are not outright waivers, but what’s disappointing is that debt recoveries remain piecemeal. For instance, while lenders referred 28,000-56,000 cases annually to debt recovery tribunals in the last years, involving amounts as high as ₹4 lakh crore, recoveries ranged between ₹8,113 crore and ₹39,777 crore a year. It means all efforts should now be towards higher recoveries and lower write-offs.