The **Reserve Bank of India has confirmed that gross non-performing assets of scheduled commercial banks have touched a multi-decadal low of 1.8% by the end of March 2026, representing a significant improvement from previous levels. According to the latest Financial Stability Report released on Tuesday, the improvement in asset quality was broad-based across bank groups, with credit quality improving across all broad economic sectors. However, agriculture continued to exhibit the highest gross non-performing asset ratio of 5.1% and accounted for the largest share of scheduled commercial banks' GNPAs at 37.2% in March 2026. Despite these record lows, stress tests showed that under the baseline scenario, the aggregate GNPA ratio may edge up from 1.8% in March 2026 to 1.9% by March 2028. Under adverse scenarios, the ratio could rise to 3.8% and 4.1% respectively, with Adverse Scenario 1 assuming further intensification of geopolitical risks and elevated energy prices, while Adverse Scenario 2 assumes prolonged geopolitical conflicts extending to 2027-28. As per The Economic Times, Indian banks are projected to see a slight increase in bad loans to 1.9% by March 2028, yet the system remains robust with strong capital and healthy profits, with the RBI's report highlighting resilient balance sheets and improving credit growth.
The Reserve Bank of India has identified AI-enabled cyberattacks as the biggest near-term cyber risk facing India's financial system, according to the latest Financial Stability Report released on Tuesday. According to the RBI's survey of major banks and NBFCs, AI-powered cyber threats were perceived as the most significant emerging risk, driven by advances that could increase the sophistication, speed and scale of cyberattacks. The central bank warned that cyber risk has become an increasingly important financial stability concern as rapid digitalisation has expanded the attack surface for malicious actors, exposing financial institutions to service disruptions, data breaches and payment system outages that could undermine public trust. While institutions have begun integrating AI-related risks into their cybersecurity frameworks, preparedness remains uneven with most respondents classified at the "developing" or "intermediate" stages of AI-enabled threat readiness, with only a small proportion considering their capabilities to be mature. As per Mint, survey responses indicate that AI-enabled threat preparedness is at varying stages of formalisation and implementation within their existing cyber risk management frameworks. Rapid advances in AI can increase the sophistication, speed and scale of cyber incidents, creating new vulnerabilities for the financial sector. Top Indian banks are racing to gauge how vulnerable they are to cyber attacks backed by artificial intelligence models such as Claude Mythos, seeking help from consultants to submit a report to the regulator by the month-end deadline, as reported by Mint.
The banking sector's fundamental strength continues to support overall financial system stability, with scheduled commercial banks' capital adequacy ratio (CAR) and Common Equity Tier 1 (CET1) ratio standing at 17.7% and 15.3% respectively at the end of March 2026. The aggregate CET1 capital ratio of the selected 46 banks may decline from 15.2% in March 2026 to 13.9% by March 2028 under the baseline scenario, though both public sector and private sector banks reported higher capital adequacy ratios in March 2026. The increase in CAR can be attributed to higher growth in capital relative to the growth in risk-weighted assets (RWAs) during the period. The RBI noted that beneath the aggregate expansion in credit, the growth in credit risk-weighted assets was lower than overall credit growth during 2025-26 for the first time in three years, indicating a broad-based shift towards lower risk-weighted credit exposures and an improving risk profile of incremental lending. The provisioning coverage ratio (PCR) of scheduled commercial banks remained broadly stable at 75.6%. However, funding challenges are emerging as savers seek higher returns, and banks' liability profile is shifting from low-cost current and savings account (CASA) to higher-cost term deposits and certificates of deposit, pushing up the marginal cost of funds. The RBI said that banks have resorted to higher-yielding loan avenues like small business lending to protect margins, with the aggregate GNPA ratio of 46 banks expected to inch up from 1.8% in March 2026 to 1.9% by March 2028. Despite these challenges, no bank would drop below the minimum capital requirement of 9% under the baseline scenario, even though one and two banks may fall below the requirement under adverse and severe stress scenarios respectively.
The RBI's latest Financial Stability Report highlights significant inflationary pressures ahead, with a combination of conflict-driven supply shock and projected weak monsoon due to El Nino expected to push headline inflation to the higher end of the tolerance band or around 6% in Q3FY27. The central bank noted that a weaker monsoon due to El Nino can worsen inflation expectations, adding to existing inflationary pressures. On the economic front, the RBI noted that fiscal deficit can come under pressure because of the higher prices of energy and other commodities, their limited pass through to pump prices, excise duty cuts and higher outgo on subsidies. Despite these challenges, the RBI emphasised that the pressure on the exchange rate and bond yields has eased post the measures taken by the RBI and the Government to attract capital flows, helping overall financial conditions to ease. The central bank also highlighted that the interim peace deal between Iran and the US can provide tailwinds to Indian economic growth, though it flagged that exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory.
Despite global financial stability concerns, the RBI struck a more reassuring tone for India's financial system, stating that "macroeconomic fundamentals are stronger compared to many of its peers" and that a "robust and resilient financial system, underpinned by strong bank and non-bank balance sheets with adequate capital and liquidity buffers, provides a strong foundation." As per the latest Financial Stability Report, "India's sound macroeconomic fundamentals place it in a stronger position than many of its peers and provide greater resilience to external shocks than in past crisis episodes." The central bank noted that scheduled commercial banks continue to be well-capitalised, with improving asset quality, stable profitability and healthy liquidity buffers. Macro stress test results showed that SCBs aggregate capital levels will continue to remain above the regulatory minimum, even under adverse stress scenarios. The Indian economy and financial system are exposed to geopolitical tensions and associated shocks, despite receding headwinds from the West Asia conflict amid the signing of the interim peace deal. The RBI also highlighted that the overall debt of the household sector continued to trend upward and touched 45.5% of the country's gross domestic product (GDP), due to an uptick in non-housing retail loans. Non-housing retail loans constituted 58.4% of total borrowings as of March 2026, with their share increasing steadily over time, consistently outpacing housing loans as well as agriculture and business loans. The RBI added that while 79% of respondents reported that over three-fourths of customer transactions are conducted digitally, institutions generally viewed their cyber risk exposure as manageable, with 98% rating current risk levels as very low to moderate, suggesting confidence in the adequacy of their existing risk management frameworks.
