Why the RBI Is Warning Against New Financial Risks Even as Banks Look Healthier

Indian banks are stronger than they have been in decades — leaner balance sheets, lower bad loans, and solid profitability. Yet the Reserve Bank of India’s latest Financial Stability Report (FSR) strikes a careful note of caution. Beneath the surface of improved asset quality, the central bank flags emerging risks — from unsecured lending and fintech exposure to global shocks and the growing footprint of stablecoins. The message is clear: stability today does not guarantee safety tomorrow.

Why the RBI says banks are healthier than before

The most reassuring signal in the FSR is the sharp improvement in asset quality. Gross non-performing assets (NPAs) fell to 2.1% in the September 2025 quarter, down from 2.5% a year earlier and far below the peak of 11.5% seen in 2017–18. Net NPAs have declined in tandem, and under the RBI’s baseline projections, could fall further to 1.9% by March 2027.

Strong capital adequacy, comfortable liquidity buffers, and stable profitability have given banks a resilience they lacked a decade ago. According to the “Reserve Bank of India”, these buffers should allow lenders to absorb moderate shocks without threatening systemic stability.

The stress scenarios that still worry the regulator

The RBI’s comfort is conditional. Under adverse macroeconomic scenarios — driven by global slowdown, financial volatility or geopolitical shocks — gross NPAs could rise sharply to 3.2–4.2%. While this would still be far from crisis levels, it underlines that the clean-up of bank balance sheets is not irreversible.

Externally, geopolitical tensions and trade disruptions are identified as near-term risks. Global financial markets remain fragile, and spillovers can quickly affect capital flows, currency stability, and funding conditions for Indian institutions.

Unsecured lending and fintech exposure: a domestic red flag

On the domestic front, the RBI points to rapid growth in unsecured lending as an area of concern. Easy digital credit, buy-now-pay-later products, and app-based personal loans have expanded access — but also raised the risk of over-leveraging, especially among smaller enterprises and vulnerable borrowers.

The central bank also highlights the growing interconnectedness between banks and non-bank financial companies (NBFCs). While NBFCs play a crucial role in credit delivery, stress in this segment can quickly transmit to the banking system, given shared exposures and funding links.

Why stablecoins have entered the RBI’s risk radar

A notable feature of the FSR is its caution on stablecoins — privately issued digital tokens pegged to fiat currencies. While not yet systemically important in India, the RBI views global stablecoin markets as a potential source of financial instability.

Their rapid cross-border use, opacity in reserve backing, and limited regulatory oversight pose risks to monetary sovereignty and financial integrity. For emerging economies, sudden adoption or capital flight through such instruments could amplify volatility rather than reduce it.

The other side of falling NPAs: massive write-offs

While declining NPAs are encouraging, the RBI’s data also reveals a less comfortable truth. Over the last five financial years and the current year up to September 2025, Indian banks have written off a staggering ₹8.90 lakh crore of bad loans. Public sector banks alone account for ₹6.16 lakh crore of these write-offs.

Write-offs are accounting measures, not loan waivers — banks still retain the right to recover dues. But in practice, recoveries have been modest. Each year, lenders referred between 28,000 and 56,000 cases to debt recovery tribunals, involving amounts of up to ₹4 lakh crore. Actual recoveries ranged from just ₹8,113 crore to ₹39,777 crore annually.

Why recoveries, not just write-offs, now matter

This gap between write-offs and recoveries raises uncomfortable questions. Cleaning up balance sheets through write-offs improves headline asset quality, but without stronger recovery mechanisms, it risks weakening credit discipline over time.

For the banking system to remain credible and efficient, the focus must now shift decisively toward improving recoveries — through faster insolvency resolution, stronger enforcement, and better coordination between lenders and tribunals.

A system that is stable — but not self-sustaining

The RBI’s assessment is ultimately a balanced one. India’s banks and non-bank lenders are in far better shape than in the past, with strong capital, liquidity and profitability. Yet stability is not automatic. It depends on vigilant risk management, timely regulatory intervention, and close coordination between financial institutions and the regulator.

The warning is subtle but significant: the next phase of financial stability will not be about repairing old damage, but about preventing new vulnerabilities from taking root — whether through unchecked unsecured lending, fintech exuberance, or the quiet rise of global financial risks.