Holding steady: Banks resilient as global spillovers and risks persist

RBI says banks and NBFCs remain resilient with strong capital and asset quality, but flags risks from unsecured lending and global spillovers in a volatile world

In his foreword to the Financial Stability Report of December 2025 (FSR: December 2025), Reserve Bank of India (RBI) Governor Sanjay Malhotra said banks and non-banking financial institutions remain healthy, bolstered by strong capital and liquidity buffers, robust earnings and improved asset quality. Stress tests also endorse the resilience of banks and non-banking financial companies. Financial markets, however, remain susceptible to global spillovers. 

The unsecured lending segment will need to be watched. The FSR: December 2025 has it that unsecured retail lending — a key driver of bank loan growth during the post-pandemic period — declined sharply after the increased risk weighting on certain consumer segment loans in November 2023. But, even as asset quality in the aggregate remains stable (gross bad loans at 1.8 per cent vis-à-vis 1.1 per cent for retail advances), slippages in unsecured retail loans constituted 53.1 per cent of the total banks’ retail loan slippages. That said, there are no alarm bells here though. At the systemic level, banks’ asset quality remained sound with the aggregate gross non-performing asset ratio showing further improvement — it fell to 3.3 per cent in September 2025 from 5.2 per cent in September 2023. The improvement is seen across sectors, even though the default rate for micro enterprises remained a tad elevated. 

What is also heartening is that the central bank’s analysis of sectors that were potentially exposed to higher US tariffs showed that the share of banks’ lending to these sectors remained steady at 12.6 per cent as at end-September 2025. Now, a trade deal with the US is still in the works; a positive outcome will bring dividends, but there is the latest threat by President Donald Trump to slap 25 per cent tariff on any country that continues to do business with Iran. This, and the larger geopolitics — Ukraine, Venezuela, and Greenland — pan out as imponderables. For instance, will tariffs on oil purchases from Iran lead to their price moving northwards? If so, will it lead to a higher import bill and weaker rupee? 

On the economy, as per the first advance estimates of National Income released by the National Statistical Organisation, our real GDP, and gross value added growth for FY26 are projected at 7.4 per cent, and 7.3 per cent, respectively. 

What has not come through is a green taxonomy. The ‘Trend on Progress of Banking in India’ report for FY25 said climate finance is both a national imperative, and a collective responsibility, and requires coordination across regulators, institutions, governments, and global actors. And regulated entities are required to invest in structured upskilling and focus on board-level orientation and ‘tone from the top’ leadership to integrate physical and transition risks, and sustainable finance into core strategy. 

Be as it may, banks’ financials and the broader economy when read together provide enough to cheer about. As Mr Malhotra noted in his foreword, despite a volatile and unfavourable external environment, the Indian economy is projected to register high growth, driven by strong domestic consumption and investment. Nonetheless, there is a need to recognise the near-term challenges from external spillovers, and continue to build strong guardrails to safeguard the economy and the financial system from potential shocks.