The Indian economy and its financial system have demonstrated remarkable resilience despite facing significant external shocks, Reserve Bank of India Governor Sanjay Malhotra stated on Tuesday. Speaking on the release of the Financial Stability Report (FSR), Malhotra acknowledged that while strong macroeconomic fundamentals provide ample buffers, the risk of adverse external shocks, including geopolitical conflicts and fragmentation, has increased.
Banking Sector Strength and Low NPAs
The FSR projects that the bad loan ratio for banks is expected to remain below 2 percent under its baseline scenario, signaling robust health in the banking sector. Gross Non-Performing Assets (NPAs) of banks saw a considerable reduction, declining to 1.8 percent as of March 31, 2026. This marks a significant improvement from 2.3 percent in March 2025 and 2.8 percent in March 2024.
The report highlighted that this improvement in asset quality has been broad-based across various bank groups. The annual slippage ratio also moderated steadily over the last four financial years, reaching 1.2 percent in 2025-26, largely due to fewer fresh additions to impaired assets in both public and private sector banks.
Looking ahead, the RBI forecasts the gross NPA ratio for 46 banks to be 1.9 percent by March 2028. However, the report also issued a cautionary note, stating that under adverse scenarios, this ratio could potentially rise to 3.8 percent and even 5.1 percent, underscoring the need for continued vigilance.
External Risks and Macroeconomic Buffers
Governor Malhotra emphasized that while India's sound macroeconomic fundamentals offer strong defenses against external shocks, the economy is not entirely immune. The FSR specifically pointed out the nation's high dependence on imported oil and other key commodities, which exposes it to energy price shocks and supply-chain disruptions. Policymakers face ongoing challenges in navigating these global uncertainties.
Stress Tests Confirm Banking System Resilience
To assess the banking system's robustness, the FSR included stress tests for the sectoral credit risk of Scheduled Commercial Banks (SCBs). These tests evaluated the impact of hypothetical scenarios, such as a one-standard-deviation and a two-standard-deviation increase in gross NPA ratios across respective sectors as of March 2026. The results indicated only a marginal impact on the aggregate capital of SCBs, reinforcing the banking system's resilience to sector-specific credit risks.