R. Suryamurthy
India’s banking sector remains well-insulated from global economic turbulence, thanks to strong domestic macroeconomic fundamentals, Moody’s Ratings said in its latest report released on June 3, 2025. The agency expects the system-wide non-performing loan (NPL) ratio to stay between 2% and 3% over the next 12 months—an improvement from 2.5% at the end of December 2024.
Moody’s attributes this resilience to robust government capital expenditure, tax cuts aimed at stimulating consumption, and accommodative monetary policy. The Reserve Bank of India’s (RBI) recent actions—liquidity infusions and a repo rate cut—have improved borrower repayment capacity. India’s relatively limited dependence on global goods trade also buffers the banking system from external volatility.
Healthy Wholesale and Secured Loan Portfolios
Wholesale loans, a core component of bank portfolios, remain strong due to corporate profitability and low leverage. While rising global trade tensions could impact small exporters and add risk to bank assets, the overall outlook remains stable.
In retail lending, secured loans continue to perform well, with housing loans—the largest retail segment—supported by steady employment, healthy loan-to-value ratios, and rising urban housing demand. However, two-wheeler loans are showing signs of strain due to maturing debt and a dip in post-pandemic demand, particularly among younger, lower-income borrowers.
Unsecured retail loans, including microfinance, remain a concern. High competition has driven rapid growth in this segment, increasing borrower stress—particularly among subprime borrowers. Loan write-offs and regulatory caps on borrower exposure have been introduced to curb risks.
Regulatory Oversight Ensures Stability
The RBI’s proactive regulations have contained overheating in risk-prone sectors. Tighter norms for unsecured loans and NBFC exposures since November 2023, and proposed curbs on gold loans in April 2025, are expected to moderate credit growth.
Despite a slowdown in system-wide loan growth to 11–13% in FY26 (from an average of 17% in FY22–24), asset risks from NBFC exposures—comprising around 9% of total bank lending—remain manageable. The NBFC sector remains largely well-capitalized, though some microfinance NBFCs may require fresh capital amid rising delinquencies.
