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The Reserve Bank of India (RBI) has released its latest Financial Stability Report (FSR), offering valuable insights into the health and resilience of India’s financial sector. As the year draws to a close, the report sheds light on emerging trends, potential risks, and the overall robustness of the banking and non-banking financial institutions. Here’s a comprehensive overview of the critical findings and what they mean for the Indian economy in the coming year.

The Good News: Robust Banking Performance

Declining NPAs – A 12-Year Low

One of the most encouraging indicators in the report is the continued decline in Non-Performing Assets (NPAs). As of September 2024, the Gross NPA (GNPA) ratio fell to 2.6% – the lowest in 12 years. This marks a significant improvement from previous years, reflecting enhanced asset quality and efficient risk management across banks.

Strong Capital Buffers

Banks are maintaining healthy capital positions. The Capital to Risk-Weighted Assets Ratio (CRAR) stands at 16.8%, while the Common Equity Tier 1 (CET1) ratio is at 13.7%. These figures suggest that Indian banks are well-equipped to absorb potential shocks, providing confidence to investors and depositors alike.

Profitability on the Rise

Profitability metrics have shown notable improvement. The Return on Assets (RoA) reached 1.2%, and the Return on Equity (RoE) hit 12.9% – the highest in a decade. This boost in profitability can be attributed to lower provisioning requirements and increased lending activity, signaling a robust recovery post-pandemic.

Areas of Concern: Where Caution is Advised

The Shadow of Rising NPAs

Despite the positive trends, the RBI warns that the GNPA ratio could edge up in the near future. Projections indicate that by March 2026:

Under the baseline scenario, the GNPA ratio may rise to 3%.

In adverse conditions, this figure could reach 5% to 5.3%.


Although manageable, this increase highlights the importance of prudent lending practices and close monitoring of stressed sectors.

Unsecured Lending – A Growing Risk

The report points to a sharp rise in NPAs in the unsecured loan segment. Notably, unsecured personal loans and credit card debt account for over 51.9% of fresh NPAs in the retail segment as of September 2024. This trend signals potential overheating in the consumer credit market, warranting tighter regulations and more conservative lending practices.

Liquidity Deficit Worsens

A significant concern flagged by the RBI is the widening liquidity deficit. The banking system’s liquidity shortfall stood at ₹2.43 trillion as of December 23, 2024. This liquidity crunch stems from factors such as tax outflows, foreign exchange interventions, and increased government borrowings.

Market experts are advocating for measures such as:

Open market bond purchases by the RBI.

A potential reduction in the Cash Reserve Ratio (CRR) to infuse liquidity into the system.

External Risks and Unhedged Borrowings

Another red flag raised by the report is the high level of unhedged external commercial borrowings (ECBs). As of September 2024, 34.4% of ECBs, amounting to $65.49 billion, remain unhedged. In the event of currency volatility, this could expose Indian borrowers to significant financial risks.

The Non-Banking Financial Company (NBFC) Outlook

NBFCs continue to play a pivotal role in India’s financial ecosystem. The sector has shown resilience and improved capital positions:

The CRAR for NBFCs stands at 27.6% (well above the regulatory minimum of 15%).

The GNPA ratio for NBFCs dropped from 7.2% in December 2021 to 4.6% by September 2024, reflecting better risk management and recovery mechanisms.

Economic Outlook: A Mixed Bag

The RBI projects India’s GDP to grow by 6.6% in the fiscal year 2024-25, driven by factors such as:

Revival in rural consumption.

Increased government expenditure.

Strong services exports.


However, the global economic slowdown, geopolitical tensions, and fluctuating commodity prices remain risks that could dampen growth prospects.

Key Takeaways for Policymakers and Investors

Banks Need to Tighten Lending Standards: With unsecured lending contributing significantly to fresh NPAs, banks should adopt more stringent credit assessment frameworks.

Addressing Liquidity Deficit: Policymakers may need to explore aggressive liquidity infusions to ease the deficit, ensuring smooth credit flow in the market.

Focus on Hedging External Debt: Corporates should hedge their foreign currency borrowings to mitigate risks arising from exchange rate fluctuations.

Strengthening Governance: Continuous emphasis on governance, risk management, and technology adoption will be critical to ensuring the long-term stability of the financial system.

A Resilient but Cautious Path Forward

The RBI’s Financial Stability Report 2024 paints a picture of a resilient Indian banking sector that has made significant strides in reducing NPAs and strengthening capital buffers. However, challenges persist, particularly in the areas of unsecured lending, liquidity management, and external borrowings.

As we enter 2025, the focus will be on sustaining this stability while navigating the evolving economic landscape. The RBI’s proactive approach and the banking sector’s robust fundamentals provide a strong foundation for growth, but vigilance and strategic foresight will be essential in steering the sector towards sustained prosperity.