Indian banks have achieved their best performance in a decade, with gross NPAs falling to a multi-decadal low of around 1.8% in March 2026 and net NPAs at about 0.4%, according to Motilal Oswal Financial Services Ltd. This historic improvement in asset quality, confirmed by Goldman Sachs projections, represents a sharp turnaround from the stress witnessed during the previous decade when elevated corporate leverage and mounting bad loans weighed on bank profitability and constrained credit growth. The assessment comes as system-wide bank credit growth accelerated to 14.5% year-on-year during 2025-26, while deposit growth stood at 11.5%, demonstrating the sector's strengthened capacity to support lending expansion. Motilal Oswal highlighted that capital adequacy also remained comfortable, with the banking sector emerging stronger after a prolonged clean-up of stressed assets and balance-sheet repair.
Regional Rural Banks (RRBs) reported a record consolidated net profit of ₹10,176 crore in FY26, representing a substantial 49% increase from ₹6,820 crore in FY25, according to the Finance Ministry. The total business of RRBs crossed ₹13.5 lakh crore, surpassing the business levels of several individual Public Sector Banks. Alongside profitability, asset quality showed steady progress with Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) declining to historic lows of 5.3% and 2.1% respectively. The Credit-Deposit (CD) Ratio climbed to an all-time high of 75.2% during the financial year, while the 28 RRBs operate through a network of 22,273 branches across 26 States and three Union Territories, catering to approximately 700 districts nationwide. In targeted credit delivery, RRBs achieved all prescribed targets under Priority Sector Lending and expanded rural financial inclusion by opening more than 54.98 lakh new Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts during FY 2025-26.
The Finance Ministry has urged regional rural banks to accelerate the adoption of modern banking technology and the digital delivery of financial services to improve operational efficiency and customer experience. After a review meeting of RRBs, financial services secretary Sanjay Lohia urged sponsor banks to handhold RRBs in their growth journey, particularly in strengthening IT infrastructure. He emphasized that RRBs must accelerate the adoption of modern banking technology and the digital delivery of financial services to improve operational efficiency and customer experience while expanding access to banking services in rural and far-flung areas. The secretary urged RRB chairpersons to take personal initiative to boost credit flow to sectors specific to their respective areas of jurisdiction and, wherever possible, introduce new and innovative avenues of lending. He also highlighted the need for RRBs to ensure that the benefits of digital banking reach every section of society, including the youth of the country, as the meeting was attended by the Chairman, NABARD, chairpersons of all 28 RRBs, officials from the Department of Financial Services, Sponsor Banks, the Reserve Bank of India and the Small Industries Development Bank of India (SIDBI).
Indian banks are approaching a cyclical turning point with core pre-provision operating profit (PPoP) growth projected to accelerate to around 17.5% annually between FY26 and FY29, according to Goldman Sachs. The expected recovery marks a significant shift from the subdued earnings growth seen in recent years, with the improvement driven by loan growth of about 14%, a 10-basis-point recovery in net interest margins (NIMs) from their projected FY7 trough, and relatively benign asset quality despite near-term macroeconomic and geopolitical risks. As reported by Goldman Sachs, early indicators point to an improvement in operating conditions for the financial sector, with the investment bank's proprietary GS India Banks Leading Indicator pointing to a gradual improvement underpinned by healthy GDP growth, improved liquidity from RBI measures, and easier funding conditions. Motilal Oswal notes that with NPAs at historically low levels and capital positions remaining healthy, banks are better placed to expand lending while maintaining prudent underwriting standards.
The Motilal Oswal assessment aligns with the Reserve Bank of India's latest Financial Stability Report, which showed that banks remained resilient, with strong capital buffers and the ability to withstand severe stress scenarios. The central bank's assessment validates the financial services firm's bullish outlook for the banking sector. Motilal Oswal emphasized that the improvement in asset quality marks a sharp turnaround from the stress witnessed during the previous decade, with the banking sector emerging stronger after a prolonged clean-up of stressed assets and balance-sheet repair. The firm's observations highlight how the banking sector has emerged stronger after a prolonged clean-up of stressed assets and balance-sheet repair, positioning it as an important beneficiary of the improving credit cycle.
