The nation’s banking sector remains resilient, marked by strong balance sheet growth while bad loans have declined to a multi-decadal low, a central bank report has said.
The gross non-performing assets ratio of banks has dropped to a multi-decadal low of 2.1% as of September 2025, from 2.2% as of March 2025, the Reserve Bank said in the ‘trends and progress of banking report for FY25’ released Monday.
“Banks remain well-capitalised with leverage and liquidity ratios well above the regulatory minimum. These strong fundamentals provide a buffer against risks and support the banking sector’s capacity to sustain credit expansion,” the central bank said.
Factors which stood out for the banking sector included profitability, asset quality and capital ratios. The RBI said profitability remained strong, as reflected in an increase in their return on assets, while asset quality improved further as gross non-performing assets ratio declined to a multi-decade low.
Asset quality of retail loans such as housing, education and credit card has improved even though certain segments continue to see strains, the report said, adding within retail loans, the bad loan ratio for consumer durables is the highest, while within loans to industry, the leather and leather products segments continued to have the highest bad loan ratio.
Over the past two years, banks have gone slow on consumption-oriented credit like personal loans and credit cards as well as credit for consumer durable purchases and vehicles. This was due to the hike in risk weighted capital ratio to 125% in November 2023 over its concerns over a surge in small-ticket personal loans. But this was reversed earlier this earn but loans have not grown as fast as it used to be when it was trending above 30%.
Meanwhile, the asset quality of non-bank finance companies also improved further in 2024-25 amid sustained double-digit balance sheet growth, the central bank said.
Banks’ deposits and credit grew in double-digits percentages in FY25, but moderated from the previous year, the report said. And so did the profit growth due to lower interest margins, it said.
However, lenders remain well-capitalised with leverage and liquidity ratios well above the regulatory minimum, RBI said.
Citing growing risks from climate change to financial stability, the central bank said it is building an information system to identify climate risks and is working towards a climate risk disclosure framework.
“Climate finance is both a national imperative and a collective responsibility and it requires coordination across regulators, institutions, governments, and global actors,” it said.
Meanwhile, warning that competition from equity markets and technology will keep banks on their toes, the report said, banks will continue to face competition from non-bank sources in lending to companies, while fast-changing technology could change how customers transact and pose cybersecurity risks.
The report also said notwithstanding a moderation in bank credit in FY25, funding for the commercial sector grew due to an increase in flows from non-bank sources, led by the equity markets. The increase in funding from non-bank sources in FY25 was largely driven by buoyant domestic capital markets.
RBI defines the flow of financial resources to the commercial sector as the aggregate of bank loans, loans from non-banks, and investment by Life Insurance Corporation in corporate debt, apart from funds raised overseas.
“The increase in funding from non-bank sources in FY25 was largely driven by buoyant domestic capital markets, reflected in higher equity issuances and increased corporate bond placements amidst easing market conditions, enhanced credit flow by non-banks, and a rebound in short-term external credit,” it said.
Non-food bank credit accounted for 55% of total resources to companies as of end November 2025, while the remaining 45% came from non-bank sources. These included equity issuances, corporate bonds, commercial papers and overseas borrowings, among others. The share of non-food credit was at 57% in the same period in FY25, the data showed, pointing to an increase in the share of non-bank sources. Non-food credit is bank credit adjusted for loans given to the Food Corporation.
The report also said rapidly changing technology and digitalisation could change the way people transacted with banks for their savings and credit needs, while also exposing the banking system to new risks.
“Strengthening risk assessment and improving operational efficiency through responsible technology adoption remain essential, with continued emphasis on financial inclusion, consumer education and protection,” it said.
