Indian banks’ bad loans likely to fall, but risks from non-banks rise

September 22, 2026 admin 0 Comments asset quality, FINANCIAL STABILITY, Indian Banks, NBFCs, rbi, Risk management

India’s banking sector is expected to see a further decline in bad loans, even as risks are building up in the non-banking financial sector, the Reserve Bank of India has warned, according to its latest assessment cited by Reuters.

The central bank noted that asset quality across scheduled commercial banks continues to improve, supported by stronger balance sheets, tighter underwriting standards, and sustained economic growth. Gross non-performing asset (NPA) ratios are projected to remain near multi-year lows, reflecting better credit discipline, higher recovery rates, and improved provisioning practices. Banks have also strengthened their capital buffers, enhancing their ability to absorb potential shocks.

However, the RBI cautioned that vulnerabilities are rising outside the traditional banking system. Non-banking financial companies (NBFCs), which play a significant role in lending to small businesses, retail borrowers, and underserved segments, are facing increasing pressure from higher funding costs and tighter liquidity conditions. The central bank warned that stress in the NBFC sector could spill over into banks through interconnected funding and credit exposures.

The report flagged unsecured retail lending and borrower concentration as key risk areas, particularly amid strong credit growth. While lending momentum remains robust, the RBI stressed that aggressive expansion without adequate risk assessment could undermine financial stability. It also highlighted external risks, including global financial market volatility and geopolitical tensions, which could affect capital flows and funding conditions.

The central bank emphasised the need for continued supervisory vigilance, robust governance standards, and enhanced stress testing, especially for systemically important NBFCs. Strengthening early warning systems and risk management frameworks, it said, will be critical to containing potential spillovers.

Overall, the RBI said India’s banking system remains resilient and well positioned to support economic growth, but sustained stability will depend on prudent credit practices and close monitoring of emerging risks beyond the banking sector.