Indian banks’ bad loans may fall, but risks rise for non-bank lenders, central bank says

MUMBAI: Indian banks’ gross bad loan ratio may fall further from already low levels in the next financial year but non-bank lenders are showing signs of a rise in risk, a report published by the central bank on Wednesday showed.

Gross bad loans of Indian banks could drop to 1.9% by the end of March 2027 from 2.1% at the end of September 2025 under the so-called baseline scenario, the Reserve Bank of India said in its Financial Stability Report.

Gross bad loan ratio is the proportion of bad assets to total loans.

The baseline scenario is derived from the latest forecasts for macroeconomic variables, the RBI said. It has forecast GDP growth at 7.3% for the current financial year, and 6.7% and 6.8% for the first two quarters of 2026-27.

In two adverse scenarios, where growth slows moderately and sharply, gross bad loans may rise to 3.2% and 4.2%, the RBI said.

The Indian economy and the financial system remain robust and resilient, Governor Sanjay Malhotra wrote in the foreword of the report.

“Nonetheless, we recognise the near-term challenges from external spillovers and continue to build strong guardrails to safeguard the economy and the financial system from potential shocks,” he wrote.

Indian banking sector resilient, bad loans decline to multi-decade low, RBI report says

While banks remain healthy, the RBI warned of building pressures on non-banking financial companies (NBFCs) and insurance firms.

Gross bad loans of non-bank lenders may rise to 2.9% in September 2026 from 2.3% in September 2025, the RBI said. The central bank had done stress tests on 174 NBFCs over a one-year horizon.

“Even as the GNPA (gross non-performing assets) ratio in NBFCs has declined, fresh accretions to NPAs are trending higher. Moreover, write-offs are also growing, indicating some build-up of stress in their loan portfolio,” it said.

The central bank also cautioned that insurance companies are seeing rising costs, which could weaken profitability in the sector.

WARNING AGAINST STABLECOINS

The central bank reiterated its concerns about the increasing global acceptance of stablecoins, and instead advocated for the adoption of central bank digital currencies.

The RBI maintains a cautious stance on crypto assets, including stablecoins, it said, citing financial stability risks from their growing use.

“Risks from stablecoins to macrofinancial stability outweigh their purported benefits,” it said.

The RBI said it “strongly advocates” that countries should prioritise central bank digital currencies (CBDCs) over privately issued stablecoins to maintain trust in money and preserve financial stability.