Indian banks' bad loans to stay under 2% until 2028: RBI report

The Reserve Bank of India (RBI) has projected that Indian banks' bad loans will remain below 2% through 2028, according to its latest Financial Stability Report released on Tuesday. The forecast signals sustained improvement in the health of the banking sector, which has been recovering from a peak bad loan ratio of over 11% in 2018.

The central bank's assessment comes amid a period of robust credit growth and declining non-performing assets (NPAs) across public and private sector lenders. Gross NPAs for the banking system are expected to stay in the range of 1.7% to 1.9% over the next two years, the report stated.

Strong buffers and better underwriting

The RBI attributed the positive outlook to stronger capital buffers and improved risk management practices at banks. The system-wide capital adequacy ratio stood at 16.2% as of March 2026, well above the regulatory minimum of 11.5%.

Banks have also tightened lending norms, particularly in the retail and corporate segments. This has helped contain fresh slippages even as credit growth has remained healthy, expanding at around 14% annually over the past year.

Public sector banks, which once dragged down the system with high NPAs, have seen their bad loan ratios fall sharply. Their gross NPAs dropped to 2.8% from 4.2% a year ago, narrowing the gap with private sector peers.

Stress tests show resilience

The RBI's macro stress tests indicate that even under a severe adverse scenario, the system-level gross NPA ratio would rise only to 3.5% by March 2028. That is still a fraction of the 11.5% peak witnessed in 2018.

Under the baseline scenario, the report projects gross NPAs at 1.8% by March 2027 and 1.7% by March 2028. The moderate stress scenario puts the ratio at 2.5% and 2.6% respectively.

The central bank noted that banks have enough provisions to absorb potential losses. The provision coverage ratio stood at 74.5% as of March 2026, offering a comfortable cushion.

Credit growth momentum continues

Credit growth has remained broad-based, with retail loans expanding at 16.2% and corporate loans at 12.8% year-on-year. The report highlighted that the quality of new loans has improved, with fewer accounts turning bad within a year of disbursement.

Housing and vehicle loans have seen particularly strong demand, supported by stable interest rates and rising incomes. The RBI, however, cautioned banks to monitor unsecured personal loans and credit card portfolios, where delinquency rates have inched up slightly.

On the deposit side, growth has lagged loan growth, putting some pressure on liquidity. Banks have responded by raising deposit rates and tapping into certificate of deposit markets.

What to watch

The RBI's positive forecast hinges on sustained economic growth and stable interest rates. Any sharp slowdown in GDP expansion or a sudden spike in inflation could alter the trajectory.

Banks will also need to keep a close watch on global headwinds, including geopolitical tensions and volatile capital flows. The central bank has indicated it will continue to monitor the situation and adjust regulatory norms if needed.