After all the bruising, the Indian banking sector seems to be catching a breath. The Reserve Bank of India’s latest Financial Stability Report is a study in cautious optimism, with the gross non-performing assets (NPA) ratio of 46 scheduled commercial banks at a multi-decadal low of 2.3 percent as of March 31, 2025.
The net NPA ratio is even more impressive at 0.5 percent, a number that would’ve seemed like a dream just a decade ago when bad loans were choking the system.
But the champagne will have to wait. The RBI’s stress tests throw in a reality check: under a baseline scenario, gross NPAs could creep up to 2.5 percent by March 2027.
If things go south — say, due to adverse macroeconomic shocks — the figure could balloon to 5.3 percent or above. This isn’t alarmist. It’s the RBI doing what it does best — keeping a hawk’s eye on the system while preparing for the worst.
The numbers tell a story of resilience but with a whisper of a warning. The banking sector has clawed its way back from the dark days of 2018 when gross NPAs had ballooned past 11 percent. Years of disciplined clean up, driven by write-offs, restructuring, and better credit discipline, have brought us here.
NPAs: Private lenders doing a better job?
The report, released on June 30, says that write-offs, particularly by private and foreign banks, have been a key weapon in this fight, accounting for a chunky 31.8 percent of gross NPA reduction in 2024-25, up from 29.5 percent the previous year.
Public sector banks though are lagging a bit, showing a marginal dip in write-offs. This divergence is worth watching.
Private banks, with their nimbler balance sheets, seem to be outpacing their public sector counterparts in shedding bad loan baggage. What is heartening is the stability in new bad loan accretions. The half-yearly slippage ratio, which tracks fresh NPAs as a share of standard advances, has held steady at 0.7 percent.
This suggests banks aren’t just cleaning up old messes but are also getting better at keeping new ones at bay. The provisioning coverage ratio, at 76.3 percent in March, is a tad lower than six months prior but still robust, offering a decent cushion against potential shocks. Yet, the RBI’s stress tests are a sobering reminder that this hard-won stability isn’t set in stone.
A global slowdown, a domestic policy misstep or a sudden spike in interest rates could unravel things quickly. The report’s projections aren’t just numbers, they’re a call to stay vigilant. The baseline scenario’s 2.5 percent gross NPA by 2027 isn’t catastrophic but the adverse scenarios — 5.3 percent and above —are a stark warning of what could happen if the economy hits turbulence.
Credit risk, market risk and interest rate shocks are all factored into these tests, and they show that while banks are stronger, they’re not invincible.
The RBI’s message is clear: don’t get complacent. For a country like India, where banking fuels everything —from small businesses to mega infrastructure projects — any wobble could ripple far and wide.
What are the takeaways? Strengthening credit appraisal, staying ahead of market risks and ensuring public sector banks don’t lag in the clean-up game are non-negotiable. It is better to act before it is too late.
(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
