Bank NPAs may edge up to 1.9% by FY28 despite stronger balance sheets: RBI in Financial Stability Report
The Reserve Bank of India expects gross bad loans of scheduled commercial banks to rise marginally to 1.9% by March 2028, even as the banking sector remains well-capitalised and financially resilient. The central bank's latest Financial Stability Report says robust capital buffers, healthy profitability and improving credit growth will help lenders withstand adverse shocks.
- Jun 30, 2026,
- Updated Jun 30, 2026 9:06 PM IST
Gross bad loans of Indian banks are expected to rise marginally over the next two years, but the country's banking system is likely to remain resilient, supported by strong capital buffers, healthy profitability and improving credit growth, according to the Reserve Bank of India's (RBI) latest Financial Stability Report (FSR) released on Tuesday.
The RBI projected the gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) to edge up to 1.9% by March 2028 from 1.8% at the end of March 2026. The central bank described the increase as modest, noting that it comes after a sustained improvement in banks' asset quality, which is currently at multi-decade highs.
According to the report, India's banking sector has continued to strengthen its financial position during FY26, backed by robust capital and liquidity buffers, stable profitability and healthier balance sheets. While credit and deposit growth moderated during the first half of the financial year, lending activity regained momentum in the second half as funding conditions improved.
MUST READ: BT Explainer: What are RBI’s new directives on bad loan recognition? How will they impact banks?
The RBI said macro stress tests indicate that the banking system remains well-equipped to absorb adverse economic shocks. Even under severe stress scenarios, banks' aggregate capital adequacy ratio is projected to remain comfortably above the minimum regulatory requirement, reflecting years of balance-sheet repair, prudent provisioning and stronger capitalisation.
Despite the projected rise in bad loans, the central bank expects banks to remain adequately capitalised and capable of supporting credit demand without compromising financial stability.
The report also highlighted the sound financial position of the non-banking financial company (NBFC) sector. According to the RBI, NBFCs continue to benefit from strong capital levels, healthy profitability and improving asset quality. Stress tests suggest that the sector's aggregate capital position would remain above regulatory requirements even under adverse scenarios, although a few individual entities could come under pressure in the event of severe stress.
MUST READ: Paying EMIs at 18%? Why clearing costly NBFC debt matters more than starting SIPs
Primary urban cooperative banks have also improved their balance sheets through better asset quality and adequate capitalisation. While profitability in the sector moderated, the RBI said stress tests indicate that the sector remains resilient overall, despite vulnerabilities at some individual institutions.
The central bank further noted that stress tests conducted for mutual funds, clearing corporations and the insurance sector also point to a resilient financial system. However, it cautioned that growing interconnectedness among banks, NBFCs and other financial institutions, while supporting deeper financial integration, could also become a channel for transmitting financial shocks during periods of stress and therefore requires close monitoring.
MUST READ: Missed EMI on a digital loan? Here's what borrowers need to know
Separately, the RBI flagged AI-enabled cyberattacks as the most significant near-term cybersecurity risk facing India's financial system. As financial institutions accelerate digital adoption and integrate artificial intelligence into their operations, the central bank said strengthening cyber resilience should remain a key priority.
Overall, the Financial Stability Report concluded that India's financial system remains well-capitalised and resilient, with banks and non-bank lenders well-positioned to withstand adverse macroeconomic conditions even as global uncertainties and technology-related risks warrant continued vigilance.
MUST READ: Can banks extend loans to non-residents against FCNR (B) deposits? Here’s what RBI says
Gross bad loans of Indian banks are expected to rise marginally over the next two years, but the country's banking system is likely to remain resilient, supported by strong capital buffers, healthy profitability and improving credit growth, according to the Reserve Bank of India's (RBI) latest Financial Stability Report (FSR) released on Tuesday.
The RBI projected the gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) to edge up to 1.9% by March 2028 from 1.8% at the end of March 2026. The central bank described the increase as modest, noting that it comes after a sustained improvement in banks' asset quality, which is currently at multi-decade highs.
According to the report, India's banking sector has continued to strengthen its financial position during FY26, backed by robust capital and liquidity buffers, stable profitability and healthier balance sheets. While credit and deposit growth moderated during the first half of the financial year, lending activity regained momentum in the second half as funding conditions improved.
MUST READ: BT Explainer: What are RBI’s new directives on bad loan recognition? How will they impact banks?
The RBI said macro stress tests indicate that the banking system remains well-equipped to absorb adverse economic shocks. Even under severe stress scenarios, banks' aggregate capital adequacy ratio is projected to remain comfortably above the minimum regulatory requirement, reflecting years of balance-sheet repair, prudent provisioning and stronger capitalisation.
Despite the projected rise in bad loans, the central bank expects banks to remain adequately capitalised and capable of supporting credit demand without compromising financial stability.
The report also highlighted the sound financial position of the non-banking financial company (NBFC) sector. According to the RBI, NBFCs continue to benefit from strong capital levels, healthy profitability and improving asset quality. Stress tests suggest that the sector's aggregate capital position would remain above regulatory requirements even under adverse scenarios, although a few individual entities could come under pressure in the event of severe stress.
MUST READ: Paying EMIs at 18%? Why clearing costly NBFC debt matters more than starting SIPs
Primary urban cooperative banks have also improved their balance sheets through better asset quality and adequate capitalisation. While profitability in the sector moderated, the RBI said stress tests indicate that the sector remains resilient overall, despite vulnerabilities at some individual institutions.
The central bank further noted that stress tests conducted for mutual funds, clearing corporations and the insurance sector also point to a resilient financial system. However, it cautioned that growing interconnectedness among banks, NBFCs and other financial institutions, while supporting deeper financial integration, could also become a channel for transmitting financial shocks during periods of stress and therefore requires close monitoring.
MUST READ: Missed EMI on a digital loan? Here's what borrowers need to know
Separately, the RBI flagged AI-enabled cyberattacks as the most significant near-term cybersecurity risk facing India's financial system. As financial institutions accelerate digital adoption and integrate artificial intelligence into their operations, the central bank said strengthening cyber resilience should remain a key priority.
Overall, the Financial Stability Report concluded that India's financial system remains well-capitalised and resilient, with banks and non-bank lenders well-positioned to withstand adverse macroeconomic conditions even as global uncertainties and technology-related risks warrant continued vigilance.
MUST READ: Can banks extend loans to non-residents against FCNR (B) deposits? Here’s what RBI says