The Reserve Bank of India's (RBI) latest stress tests paint an optimistic picture for the health of India's banking sector, forecasting a continued decline in bad loans over the coming years. According to the central bank's Financial Stability Report (FSR), the gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) is projected to improve to 1.9 per cent by March 2027, down from 2.1 per cent in September 2025.
Current Health and Future Projections
Data released on Tuesday in the RBI's annual 'Trends and Progress of Banking in India' report showed that gross NPAs have already hit a multi-year low. The ratio stood at 2.1 per cent at the end of September 2025, a slight improvement from 2.2 per cent at the close of March 2025. The forecast for March 2027 is based on macro stress tests designed to evaluate how banks would withstand potential economic shocks.
"The aggregate GNPA ratio of the 46 banks may improve from 2.1 per cent in September 2025 to 1.9 per cent in March 2027 under the baseline scenario," the RBI stated in its report. The GNPA ratio is a critical measure of asset quality, calculated by dividing a bank's gross bad loans—where interest or principal payments are overdue for more than 90 days—by its total lending portfolio.
Resilience Tested Under Adverse Scenarios
The RBI's assessment was not limited to a positive outlook. The stress tests rigorously evaluated the banking system's fortitude under two severe hypothetical situations: Adverse Scenario 1 and Adverse Scenario 2.
Under these tougher conditions, the GNPA ratio could rise significantly. The report indicated that the ratio may increase to 3.2 per cent under Adverse Scenario 1 and jump to 4.2 per cent under Adverse Scenario 2.
Adverse Scenario 1 assumes a gradual global slowdown triggered by economic uncertainty and ongoing geopolitical conflicts, leading to a dip in India's GDP growth and a moderate rise in inflation. Adverse Scenario 2 is more severe, envisioning global trade uncertainties and unfavorable deals causing a sharp contraction in domestic GDP. This scenario also factors in capital outflows, currency depreciation, and supply issues pushing inflation beyond the RBI's tolerance band, resulting in tighter monetary policy.
Capital Buffers Remain Strong
A key finding of the stress test is the robust capital position of Indian banks. The aggregate Capital to Risk-Weighted Assets Ratio (CRAR), which gauges a bank's financial strength, for the 46 major banks is projected to dip slightly from 17.1 per cent in September 2025 to 16.8 per cent by March 2027 under the baseline scenario. In the adverse scenarios, it could fall to 14.5 per cent and 14.1 per cent, respectively.
Importantly, the RBI assured that none of the banks would breach the minimum CRAR requirement of 9 per cent, even in the worst-case situations. This indicates substantial capital buffers are in place.
The tests also examined the Common Equity Tier 1 (CET1) ratio, which measures core capital. It may see a marginal improvement from 14.6 per cent to 14.8 per cent by March 2027 under the baseline. However, under stress, it could decrease to 12.7 per cent and 12.3 per cent. The report confirmed all banks would meet the minimum CET1 requirement.
Credit Concentration and NBFC Sector Insights
The RBI also conducted stress tests on banks' exposure to their largest borrowers. It found that in an extreme scenario where the top three individual borrowers of each bank defaulted, the system-wide GNPA ratio would spike by 350 basis points (bps). Concurrently, the CRAR and CET1 ratios would decline by 90 bps and 80 bps, respectively.
The resilience assessment extended to the Non-Banking Financial Company (NBFC) sector. A stress test on a sample of 174 NBFCs projected that under the baseline scenario, their system-level GNPA ratio may rise from 2.3 per cent in September 2025 to 2.9 per cent in September 2026.
The overarching message from the RBI's comprehensive analysis is one of strengthened stability. While acknowledging vulnerabilities from credit concentration and potential macroeconomic shocks, the data underscores that India's banking system is on a firmer footing, with enhanced capacity to absorb financial stress and support the nation's economic growth trajectory.
