RBI Financial Stability Report June 2025: India’s Banking Sector Emerges Stronger Than Ever

The Reserve Bank of India’s Financial Stability Report for June 2025 presents a compelling narrative of India’s banking sector achieving unprecedented resilience while maintaining its role as a key driver of global economic growth. The report reveals that India’s financial system has reached a multi-decadal milestone with the Gross Non-Performing Asset (GNPA) ratio falling to just 2.3% as of March 2025, marking the lowest level in decades and demonstrating the sector’s remarkable recovery from the asset quality challenges of the previous decade.

Visual representation of India’s banking sector financial stability and economic growth trends

Banking Sector Achieves Multi-Decadal Asset Quality Milestone

The GNPA ratio’s decline to 2.3% in March 2025 represents a significant improvement from 2.6% in September 2024, continuing the sustained improvement trajectory that began in 2020. This achievement is particularly noteworthy given that banks’ bad loans had reached crisis levels exceeding 10% during the previous decade. The RBI attributes this sustained reduction in the GNPA ratio since March 2020 primarily to a persistent fall in new NPA accretions and increased write-offs.

Under the baseline stress scenario, the GNPA ratio of all banks may rise slightly to 2.5% by March 20274, indicating that while asset quality remains robust, some marginal deterioration is expected over the medium term. However, even under severe stress scenarios, the GNPA ratio is projected to remain manageable at 3.4%, well below the levels that previously threatened banking stability.

The improvement spans across all banking segments, with public sector banks showing the most dramatic recovery, improving by 76 basis points to 3.7%. Private sector banks and foreign banks have maintained even stronger asset quality metrics, with private banks at 1.8% and foreign banks at 1.2% as of March 2024.

Capital Adequacy Remains Robust Above Regulatory Norms

Indian banks maintain strong capital buffers well above regulatory requirements, with the aggregate capital adequacy ratio standing at 17.2% as of March 2025. This is significantly higher than the regulatory minimum requirement of 9%, providing substantial cushion against potential shocks. The RBI’s stress tests demonstrate that even under heightened geopolitical risks scenarios, the aggregate capital adequacy ratio of 46 major banks may dip to 14.2%, but none would fall short of the 9% regulatory minimum.

The Common Equity Tier-1 (CET1) capital ratio is projected to rise to 15.2% by March 2027 from 14.6% under the baseline scenario, further strengthening banks’ loss-absorption capacity. Even under adverse scenarios, the CET1 ratio would fall to 12.5% but remain well above the regulatory minimum requirement of 5.5%.

Non-banking financial companies (NBFCs) demonstrate similar resilience, with their system-wide CRAR currently at 23.6%, expected to remain significantly above the regulatory minimum of 15% under all scenarios. This indicates that India’s shadow banking sector, which plays a crucial role in credit intermediation, maintains adequate capital buffers.

India Maintains Position as Global Growth Driver

Despite global economic uncertainties, India continues to serve as a key driver of global growth, with the country expected to maintain its position as the world’s fastest-growing major economy. Morgan Stanley forecasts India’s real GDP growth at 5.9% in 2025 and 6.4% in 2026, while global real GDP growth is projected to decline from 3.5% in 2024 to 2.5% in 2025.

The RBI has projected real GDP growth at 6.5% for 2025-26, supported by buoyant rural demand, revival in urban demand, and continued government thrust on capital expenditure. This growth trajectory is underpinned by sound macroeconomic fundamentals and prudent policy interventions, which have helped India weather global economic volatility.

India’s economic resilience is further evidenced by expectations to become the world’s fourth-largest economy by the end of 2025, according to the International Monetary Fund’s projections. The country’s growth momentum is driven by government spending, low interest rates, rural strength, and expected revival of consumer demand.

Key Risk Factors and Mitigation Strategies

The RBI identifies several risk factors that could pose challenges to India’s financial stability and economic growth trajectory:

Geopolitical tensions and trade disruptions represent the most significant external risks. The FSR notes that elevated economic and trade policy uncertainties are testing the resilience of the global economy and financial system. A 100 basis points slowdown in global growth could pull down India’s growth by 30 basis points, highlighting the interconnectedness of global economic conditions.

Weather-related uncertainties pose additional risks to India’s growth outlook, particularly given the country’s dependence on monsoon patterns for agricultural output and rural consumption. However, the IMD’s forecast of above-normal rainfall provides some cushion against weather-related risks.

Financial market volatility remains a concern, especially in core government bond markets, driven by shifting policy and geopolitical environments. The report warns that existing vulnerabilities such as soaring public debt levels and elevated asset valuations have the potential to amplify fresh shocks2.

Stress Testing Validates System Resilience

The RBI’s comprehensive stress testing framework provides confidence in the banking system’s ability to withstand various shock scenarios. Macro stress tests covering credit risks, interest rate risks, and liquidity risks affirm that most banks have adequate capital buffers. The tests validate the resilience of mutual funds and clearing corporations, indicating broad-based financial system stability.

In extreme stress scenarios where the top three individual borrowers of respective banks default, the system-level capital adequacy would decline by only 90 basis points, with no bank facing a drop below the regulatory minimum. This demonstrates the diversification of banking sector exposures and the effectiveness of risk management practices.

Liquidity stress tests show that all banks would maintain the Liquidity Coverage Ratio above the minimum requirement of 100% in most stress scenarios, with only marginal breaches in the most severe cases. The aggregate liquidity coverage ratio would fall from 132.1% in the baseline scenario to 117.9% in the worst-case scenario.

Outlook and Strategic Implications

The RBI’s Financial Stability Report presents a broadly positive outlook for India’s banking sector and economy, while acknowledging the need for continued vigilance against emerging risks. The resilience of the domestic financial system is continuously improving, bolstered by strong capital buffers, low non-performing loans, and robust profitability.

The healthy balance sheets of corporates, banks, and NBFCs augur well for the economy, providing a solid foundation for sustained credit growth and economic expansion. Financial conditions have eased, supported by accommodative monetary policy and low volatility in financial markets.

Governor Sanjay Malhotra emphasized that financial stability, like price stability, is a necessary condition for boosting India’s potential growth. The report underscores the importance of developing a well-functioning financial system that not only promotes macroeconomic stability but also provides financial services efficiently.

The RBI’s assessment demonstrates that India’s banking sector has successfully navigated the challenges of the past decade, emerging with stronger fundamentals and enhanced resilience. With GNPA ratios at multi-decadal lows, robust capital adequacy, and comprehensive stress testing validation, the sector is well-positioned to support India’s continued role as a global growth driver while managing the risks posed by an uncertain global environment.