Indian banks' gross bad loan ratio may edge up by March 2026: RBI report

Indian banks' gross bad loan ratio may rise from a 12-year low if risks emanating from credit quality, interest rates and geopolitics play out, a report published by the central bank on Monday showed.

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

This key measure could rise to 3 per cent by the end of March 2026 from a 12-year low of 2.6 per cent in September 2024 for 46 banks under the so-called baseline scenario, the Reserve Bank of India (RBI) said in the Financial Stability Report.

The bad loan ratio could rise to 5 per cent and 5.3 per cent under two separate high-risk scenarios, it said.

While the aggregate capital ratios of banks may reduce, no lender will fall short of the minimum capital requirement of 9 per cent even in adverse cases, the RBI said.

The Financial Stability Report, published twice a year by the central bank, includes contributions from all financial sector regulators.

Indian banks' asset quality has improved over the last few years due to recoveries and write-offs of legacy bad loans, and curtailed growth of bad assets. Banks have also shored up their capital positions.

Over the last year, the RBI has warned the financial sector against "all forms of exuberance", tightened rules for credit card and personal loans, made it more expensive for non-banking finance companies to borrow from banks and imposed business restrictions on non-compliant lenders.

It also wants lenders to adopt strong risk management and governance frameworks and to raise more capital.

On the whole, banks' asset quality parameters have improved and their capital levels remain robust, the central bank said.

The Indian financial system is expected to remain sound and vibrant, supported by further improvement in balance sheets and strong buffers, the RBI said.

"Although net interest margins have narrowed, banks' return on equity and return on assets have improved," it said.

The balance sheets of non-banking finance companies have strengthened, the RBI said, with stress tests indicating that even under a high-risk scenario, their capital requirements would remain much above the minimum needed level.