India’s banking system is entering a phase of balance sheet strength not seen in over a decade, with fresh data from the Reserve Bank of India highlighting continued improvement in asset quality and credit momentum. According to the central bank’s latest Monetary Policy Report, gross non-performing assets (NPAs) of scheduled commercial banks declined further to 2 percent in December 2025, compared to 2.5 percent a year earlier.

This steady decline in stressed assets reflects a multi-year clean-up cycle driven by recoveries, loan upgrades, and write-offs. Importantly, the improvement is not concentrated in one segment but is broad-based across retail, industry, services, and agriculture indicating a systemic strengthening rather than a cyclical aberration.

At a granular level, retail NPAs dropped to 1 percent, underscoring the resilience of household credit despite rising interest rate cycles in recent quarters. Industrial NPAs stood at 1.8 percent, suggesting that the corporate deleveraging cycle and improved cash flows continue to support repayment behaviour. Services sector NPAs eased to 1.7 percent, while agriculture traditionally more volatile also saw moderation to 5.7 percent.

The data reinforces a key structural shift in Indian banking: asset quality stress, once driven by large corporate exposures, is now significantly contained. This is a marked departure from the period following the Asset Quality Review (AQR) initiated by the central bank in the mid-2010s.

From a policy standpoint, the central bank has also sought to reassure markets about external risks. Amid concerns around the ongoing West Asia conflict and its potential impact through supply chain disruptions, RBI Governor Sanjay Malhotra indicated that there are no systemic concerns regarding bank health or profitability. While acknowledging that certain sectors could face localized stress, the broader banking system remains stable.

Parallel to the improvement in asset quality, credit growth has picked up momentum. Bank credit expanded by 13.8 percent year-on-year as of mid-March 2026, up from 11 percent in the previous year. The acceleration has been attributed to a combination of monetary policy easing and sustained economic activity.

A notable trend within credit growth is the changing competitive dynamics across bank groups. Foreign banks reported the highest credit growth at 14.7 percent, although public sector banks continue to account for the largest share of incremental lending. Private sector banks, however, are regaining momentum, with their share in incremental credit improving in recent months.

This shift suggests that while PSU banks remain dominant in volume terms, competitive intensity is increasing, particularly as private banks leverage capital efficiency and digital capabilities to capture market share.

Liquidity dynamics also reflect a rebalancing within bank balance sheets. Excess holdings of statutory liquidity ratio (SLR) securities declined to 6.3 percent of net demand and time liabilities (NDTL) as of February 2026, down from 7.3 percent a year earlier. This indicates that banks are deploying more funds towards credit rather than holding low-yield government securities.

At the same time, growth in non-SLR investments which include instruments such as corporate bonds and commercial paper remained modest at 2.7 percent in the second half of FY26. The moderation was largely due to a decline in commercial paper holdings, suggesting a cautious stance towards short-term corporate exposures.

Adjusted non-food credit growth, a broader measure that includes both direct lending and investment exposure, rose to 13.5 percent year-on-year in the fourth quarter of FY26, compared to 10.8 percent in the same period last year. This points to a synchronized expansion in both credit and investment channels.