Indian banks are stronger, more profitable, and operationally more efficient than at any point in recent decades. Yet, even as the system appears stable on the surface, the latest Financial Stability Report of the Reserve Bank of India (RBI) flags a set of emerging risks that demand close attention — from unsecured lending and fintech exposure to global uncertainties and the rise of stablecoins. The message is clear: resilience today does not eliminate vulnerability tomorrow.
Why the RBI is sounding a note of caution
The RBI’s assessment comes at a time when India’s banking system enjoys strong capital buffers, comfortable liquidity, and sustained profitability. However, the central bank warns that risks are building quietly. Globally, geopolitical tensions and trade disruptions could transmit financial shocks into domestic markets. Stablecoins and crypto-linked instruments, operating largely outside traditional regulatory frameworks, pose systemic concerns if they scale rapidly.
Domestically, the interconnectedness between banks and non-bank financial intermediaries (NBFIs) is deepening. While this integration improves credit flow, it also raises contagion risks — especially as several smaller enterprises remain stressed due to over-leveraging.
Asset quality: a remarkable turnaround
On headline indicators, the banking system looks healthier than it has in years. Gross non-performing assets (NPAs) declined to 2.1% in the September quarter, down from 2.5% a year earlier and far below the alarming peak of 11.5% seen in 2017–18.
Under the RBI’s baseline projections, net NPAs could fall further to 1.9% by March 2027. Even in adverse stress scenarios, gross NPAs are expected to rise only to the 3.2–4.2% range — levels that remain manageable given current capital adequacy and provisioning norms.
Why capital and liquidity still matter
The RBI emphasises that banks’ ability to absorb shocks rests on three pillars: strong capital buffers, ample liquidity, and sustained profitability. These provide a cushion against macroeconomic volatility and sector-specific stress. However, this resilience will hold only if risk management keeps pace with evolving credit patterns — particularly in unsecured retail lending and digitally originated loans.
The other side of the NPA story: write-offs
While falling NPAs are encouraging, they tell only half the story. Over the last five financial years and the current year up to September 2025, Indian banks have written off a staggering ₹8.90 lakh crore of bad loans. Public sector banks alone account for ₹6.16 lakh crore of this amount.
Write-offs are accounting tools — not loan waivers — but they signal the limits of recovery mechanisms. Large volumes of stressed assets are effectively being removed from balance sheets without commensurate cash recovery.
Why recoveries remain disappointing
Debt recovery outcomes remain weak despite institutional mechanisms. Banks referred between 28,000 and 56,000 cases annually to Debt Recovery Tribunals in recent years, involving amounts as high as ₹4 lakh crore. Actual recoveries, however, ranged from just ₹8,113 crore to ₹39,777 crore per year.
This gap highlights procedural delays, legal bottlenecks, and limited capacity of recovery institutions. It also raises questions about credit appraisal standards during lending booms and the deterrent effect of recovery frameworks.
Emerging risks the system must watch
The RBI flags several areas requiring vigilance:
- Rapid growth in unsecured retail lending and buy-now-pay-later models
- Increasing exposure to fintech-driven credit with limited credit history
- Interconnectedness between banks and non-bank lenders
- Systemic risks from stablecoins and crypto-linked assets
- External shocks from geopolitics and global financial tightening
What should policy focus on next?
With asset quality largely stabilised, the focus must now shift decisively from balance-sheet repair to recovery efficiency. Higher recoveries and lower write-offs are essential to ensure that credit discipline is not weakened. This will require:
- Strengthening debt recovery tribunals and insolvency processes
- Better coordination between banks and regulators
- Early identification and resolution of stress
- Stricter monitoring of unsecured and digitally originated credit
What to note for Prelims?
- Key findings of the RBI’s Financial Stability Report
- Trends in gross and net NPAs
- Risks from stablecoins and fintech lending
What to note for Mains?
- Why low NPAs do not automatically imply strong recovery outcomes
- Challenges in India’s debt recovery framework
- Systemic risks from non-bank lenders and fintechs
- Role of RBI in maintaining financial stability amid global uncertainty
