New Delhi, Jan 24 : The gross non-performing assets (NPAs) ratio of Indian banks is expected to fall further to 2.4% by March 2025, followed by another decline to 2.2% in the next financial year, according to a report by Fitch Ratings. This steady improvement reflects the success of government-backed regulatory measures and reforms aimed at strengthening the banking sector’s resilience.
The report attributes this positive outlook to robust loan growth, effective recovery mechanisms, and targeted write-offs, which are offsetting the challenges posed by rising stress in unsecured retail loans, particularly small-ticket personal loans under $600 (approximately ₹51,000).
Targeted Governance and Reforms Show Impact
Over the years, government initiatives like the Insolvency and Bankruptcy Code (IBC), targeted provisioning norms, and stricter oversight have significantly improved banks’ balance sheets. The Reserve Bank of India (RBI) has played a critical role in stabilizing the financial system by increasing risk weights on unsecured loans and implementing prudent lending norms.
The report highlights that large banks have shown greater resilience, with their exposure to riskier unsecured personal loans proportionally lower than the broader financial system. Such loans are predominantly disbursed by Non-Banking Financial Companies (NBFCs) and fintech players, catering to low-income borrowers who often lack formal income disclosures.
Managing Risks in Unsecured Lending
Unsecured personal loans and credit card borrowings grew at a compound annual growth rate (CAGR) of 22% and 25%, respectively, in the three years leading up to FY24. However, the pace slowed to 11% and 18% year-on-year in the first half of FY25, following the RBI’s policy to tighten risk weights for such lending.
Despite the rising stress in unsecured retail loans, which accounted for 52% of new bad retail loans in the first half of FY25, systemic measures are helping mitigate risks. Banks have managed indirect exposure through NBFCs and fintechs effectively, ensuring a limited impact on their core asset quality.
India’s Economic Strength as a Shield
India’s household debt, at 42.9% of GDP as of June 2024, remains one of the lowest among emerging markets in the Asia-Pacific region. This provides a buffer against the financial strain seen in the unsecured retail lending space.
According to the RBI, the impaired-loan ratio is expected to reach its lowest point in FY25 before stabilizing at around 3% in FY26. Fitch’s report noted some variance in projections but emphasized that India’s robust economic performance and prudent governance are key factors underpinning the sector’s sustained progress.
With focused government initiatives and regulatory vigilance, Indian banks are set to continue their journey toward greater stability and efficiency. The decline in NPAs underscores the impact of sound governance and reforms, positioning India’s banking sector as a resilient pillar of the country’s economy.