Gross NPA of banks decline to 12-year low of 2.6%, bad loan ratio to worsen in 2026: RBI Report
- Gross NPA (bad loans) of Indian banks dropped to a 12-year low level in September 2024 but the ratio is expected to worsen by March 2026, said the central bank in its report.
The Reserve Bank of India (RBI) said that banks' asset quality improved in 2024, with the gross non-performing assets (GNPA) or bad loans ratio falling to a 12-year low of 2.6 per cent in September 2024, driven by falling slippages and steady credit demand. The RBI said in its December 2024 issue of the Financial Stability Report (FSR) that the net NPA ratio of banks—the proportion of net NPAs in net loans and advances—was nearly 0.6 per cent.
"Buoyed by falling slippages, higher write-offs and steady credit demand, the GNPA ratio of 37 scheduled commercial banks (SCBs) fell to a multi-year low of 2.6 per cent," said the RBI. The gross bad loan ratio of banks is the proportion of bad assets to total loans. However, the RBI warned that the bad loan ratio may rise, dragged by risks from stretched asset valuations, credit quality, high public debt, and geopolitical conflicts.
Gross NPA of banks may worsen in 2026: RBI
The RBI flagged concerns over a sharp rise in write-offs, especially among private sector banks (PVBs). This could partly mask the worsening asset quality in the unsecured lending segment and dilution in underwriting standards.
In its report, the RBI warned that 46 banks' gross NPAs under the so-called baseline scenario could rise to three per cent by the end of March 2026 from a 12-year low of 2.6 per cent in September 2024. The bad loan ratio could rise to five per cent and 5.3 per cent under two separate high-risk scenarios.
The banking system’s capital adequacy ratio will likely fall to 16.5 per cent in March 2026 under the baseline scenario from 16.6 per cent in September 2024. "While the aggregate capital ratios of banks may reduce, no lender will fall short of the minimum capital requirement of nine per cent even in adverse cases," said the RBI.
Also Read: Indian banks’ profitability improves for six straight years, NPAs decline to 13-year low: RBI report
Over the last few years, the bank's asset quality has improved on recoveries and write-offs of legacy bad loans and curtailed growth of bad assets. Banks have shored up their capital positions. RBI has repeatedly warned the financial sector against "all forms of exuberance", tightened credit card and personal loan rules, made it expensive for non-banking finance companies to borrow from banks, and imposed restrictions on non-compliant lenders.
The RBI wants lenders to adopt strong risk management and governance frameworks and to raise more capital. The report revealed slippages in the unsecured loan book dominated the fresh accretion of NPAs in retail loan portfolios, with 51.9 per cent of unsecured loans. The improvement in asset quality of SCBs was broad-based across sectors and groups.
The bank's liquidity coverage ratio (LCR) fell from 135.7 per cent in September 2023 to 128.5 per cent in September 2024, driven by an increase in net cash outflows, which are influenced by a rise in less stable funding sources.
According to the report, the share of large borrowers in SCBs' GNPA has steadily declined over the past two years. The asset quality of banks’ large borrower portfolios has improved considerably, with the GNPA ratio falling from 4.5 per cent in March 2023 to 2.4 per cent in September 2024.
In the large borrower segment, the share of standard assets in the total funded amount has consistently improved over the past two years. "Within the large borrowers’ cohort, the share of top 100 borrowers has decreased to 34.6 per cent in September 2024, reflecting a growing credit appetite among medium-sized borrowers," said RBI.
None of the top 100 borrowers were classified as NPAs in September 2024. The central bank said in its report that, in terms of value, investment grade advances (rated BBB and above) constituted nearly 91.5 per cent of the funded advances to large borrowers with long-term external ratings.
Also Read: Bank fraud cases rise 27% YoY in 2024; scams worth ₹21,367 crore logged in H1FY25: RBI data
It further said that SCBs' profitability improved during H1:2024-25, with profit after tax surging by 22.2 per cent (YoY). Public sector banks (PSBs) and PVBs recorded net profit growth of 30.2 per cent and 20.2 per cent, respectively, while foreign banks (FBs) experienced single-digit growth (8.9 per cent).
RBI said the banking stability indicator (BSI), which assesses the resilience of the domestic banking system, showed further improvement during H1:2024-25. It added that robust capital buffers, strong earnings and sustained improvement in asset quality have bolstered the resilience of the domestic banking system.
The RBI said the Indian financial system is expected to remain sound and vibrant, supported by further improvement in balance sheets and strong buffers. "Although net interest margins have narrowed, banks' return on equity and return on assets have improved," it said.
In the report's foreword, new RBI Governor Sanjay Malhotra said that India’s medium-term economic outlook remains “challenging,” weighed down by geopolitical tensions, potential market turmoil, and rising indebtedness.
The RBI's stress test results revealed that capital levels of the banking system and non-banking financial companies remain well above the regulatory requirement, even under adverse scenarios. The slowdown in growth during July-September poses asset quality challenges for banks.
India’s economic expansion may slow to 6.6 per cent in FY24 after growing more than eight per cent annually in the past three years. Weak growth hurts corporate profitability and household income, making it harder for borrowers to repay loans.
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Business NewsIndustryBankingGross NPA of banks decline to 12-year low of 2.6%, bad loan ratio to worsen in 2026: RBI Report
First Published:30 Dec 2024, 07:17 PM IST
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