Indian Banks Project Slight Rise in Bad Loans by 2028, RBI Reports Resilience

Gross bad loans of Indian banks are likely to inch up to 1.9% by March 2028 from 1.8% at the end of March 2026, although the banking system is largely expected to remain resilient with strong capital buffers, healthy profitability and improving credit growth, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR) released on Tuesday.

The central bank said the projected increase in the gross non-performing asset (GNPA) ratio is modest and follows a sustained improvement in banks' balance sheets, with asset quality currently at multi-decadal highs.

Macro stress tests showed the banking system would remain well-positioned to absorb adverse shocks, with aggregate capital ratios staying comfortably above the minimum regulatory requirement even under severe stress scenarios, the report said.

It said scheduled commercial banks (SCBs) continued to strengthen their financial position during FY26, supported by robust capital and liquidity buffers, stable profitability and improving asset quality. After moderating in the first half of the financial year, credit and deposit growth gathered pace during the second half, reflecting stronger lending activity and an improving funding environment.

Despite the projected uptick in bad loans over the medium term, the central bank said banks remain adequately capitalised and are expected to withstand macroeconomic and financial stress without compromising overall stability.

According to the report, macro stress tests indicate that the banking sector is capable of absorbing potential shocks under a range of adverse scenarios. Aggregate capital adequacy ratios are projected to remain comfortably above regulatory thresholds, underscoring the resilience built up through years of balance-sheet repair and prudent provisioning.

The RBI said strong capitalisation, declining bad loans and stable earnings continue to underpin the sector's financial health, leaving lenders well placed to support credit demand even amid an uncertain global environment.

The Financial Stability Report also found that non-banking financial companies (NBFCs) remain financially sound, backed by strong capitalisation, healthy profitability and improving asset quality. Stress tests showed the sector's aggregate capital position would remain comfortably above regulatory requirements even under adverse scenarios, although a few entities could face pressure under severe stress.

Primary urban cooperative banks also continued to improve their balance sheets through better asset quality and adequate capitalisation, though profitability moderated. Stress tests suggested the sector remained resilient at the aggregate level despite vulnerabilities at some individual institutions.

The RBI said stress tests of mutual funds and clearing corporations also confirmed their resilience, while the insurance sector remained healthy. However, it cautioned that increasing interconnectedness among banks, NBFCs and other financial institutions, while reflecting deeper financial integration, could also become an additional channel for transmitting financial shocks and therefore warrants close monitoring.

Separately, the central bank identified AI-enabled cyberattacks as the most significant near-term cybersecurity challenge facing India's financial system, highlighting the need for financial institutions to strengthen cyber resilience as digital adoption accelerates.

Overall, the RBI said India's domestic financial system remains resilient, underpinned by strong bank and non-bank balance sheets, even as global uncertainties and emerging technology-related risks call for continued vigilance.