The Reserve Bank of India’s latest Financial Stability Report shows that gross non-performing assets of scheduled commercial banks have declined to around 2.1%-2.2% while net NPAs stand close to 0.5%. These levels are the best the country has seen in years and follow a long period of balance sheet repair after credit excesses, especially in infrastructure and large corporate lending. Regulatory interventions, asset quality reviews, recapitalisation of public sector banks, the strengthening of insolvency mechanisms, and more conservative lending practices have contributed to the present outcome. The fact that a sizeable share of the decline has come from recoveries and upgrades rather than write-offs suggests that borrower cash flows have improved and that stressed assets have often genuinely returned to viability. The data on slippages reinforce this. The proportion of standard loans turning non-performing has fallen steadily over the past five years even as credit growth has accelerated. This points to improved underwriting standards and disciplined risk pricing. Public sector banks, once the epicentre of bad loans, have also recorded sharp improvements.
Yet the headline numbers conceal important gaps. The most striking of these is the changing composition of NPAs in terms of sectors. Agriculture now accounts for the largest share of bad loans, far exceeding its share in overall bank credit. This rise cannot be explained only by increased lending to the sector; it signals deeper stress. Given that agricultural lending is dominated by small-ticket loans, this trend raises concerns about the financial vulnerability of small borrowers — the average agricultural debt in Indian households stood at Rs 74,121 as per the latest National Statistical Office survey — and the effectiveness of existing credit and risk mitigation frameworks in rural India. It also carries economic implications as sustained stress in agriculture translates into pressure for loan waivers, with long-term consequences for credit discipline. Retail lending presents a more mixed picture — its share in total NPAs has increased but this largely reflects the rapid expansion of personal loans rather than a deterioration in asset quality. Even so, pockets of vulnerability are emerging, particularly in unsecured retail credit. These segments warrant close monitoring as rapid growth combined with even modest stress can amplify risks over time. The broader lesson from the RBI’s data is that recovery does not eliminate risk.
