Indian Banks' Gross Bad Loan Ratio Could Rise By March 2026: RBI Report

Despite potential declines in aggregate capital ratios, the RBI assured that no bank would fall below the minimum capital requirement of 9 per cent, even under adverse conditions

Indian banks' gross bad loan ratio could rise from a 12-year low if risks related to credit quality, interest rates, and geopolitics materialize, according to a report by the Reserve Bank of India (RBI) released on Monday. The gross bad loan ratio refers to the proportion of non-performing assets to total loans.

Under the baseline scenario, this key measure is projected to increase to 3 per cent by March 2026, up from a 12-year low of 2.6 per cent in September 2024 for 46 banks, the RBI's Financial Stability Report stated. In more pessimistic high-risk scenarios, the bad loan ratio could rise to 5 per cent and 5.3 per cent, respectively.

Despite potential declines in aggregate capital ratios, the RBI assured that no bank would fall below the minimum capital requirement of 9 per cent, even under adverse conditions.

The Financial Stability Report, released biannually by the central bank, incorporates insights from all financial sector regulators.

Over recent years, Indian banks have seen improvements in asset quality, driven by recoveries and write-offs of legacy bad loans, as well as a slowdown in the growth of non-performing assets. Additionally, banks have strengthened their capital positions.

Over the past year, the RBI has cautioned the financial sector against "all forms of exuberance," tightening regulations on credit card and personal loans, making borrowing more expensive for non-banking finance companies, and imposing business restrictions on non-compliant lenders.

The central bank has also urged lenders to strengthen their risk management and governance frameworks and to bolster their capital reserves. Overall, the RBI stated that banks' asset quality has improved, and their capital levels remain strong.

The central bank expects the Indian financial system to remain stable and dynamic, supported by continued improvements in balance sheets and solid buffers. "Although net interest margins have narrowed, banks' return on equity and return on assets have improved," the RBI noted.

The balance sheets of non-banking finance companies have also shown improvement, with stress tests indicating that even in a high-risk scenario, their capital requirements would remain well above the minimum required levels.