Indian banks’ gross non-performing assets (NPAs) could improve further to 1.9% by March 2027 under the baseline scenario, after touching a multi-decade low of 2.1% as on 30 September 2025, according to the Reserve Bank of India (RBI).

In an adverse scenario, however, the RBI’s stress test projects the NPA figure could rise to 3.2%. Under the worst-case scenario, gross NPAs could climb to 4.2%.

"The aggregate gross NPA ratio of the 46 banks may improve from 2.1% in September 2025 to 1.9% in March 2027 under the baseline scenario," the RBI said in its half-yearly Financial Stability Report.

The stress test results further showed that under the baseline scenario the capital to risk-weighted assets ratio (CRAR) remained strong as of September, with state-owned banks at 16% and private sector banks at 18.1% are they are able to withstand adverse economic shocks.

"The aggregate capital to risk-weighted assets ratio (CRAR) of 46 major scheduled commercial banks (SCBs) may drop from 17.1% in September 2025 to 16.8% by March 2027 under the baseline scenario. It may fall to 14.5% and 14.1% under the hypothetical adverse scenarios 1 and 2. However, none of the banks would fall short of the minimum CRAR requirement of 9% even under the adverse scenarios, respectively," the report said.

Just two of the 46 banks may require to dip into the capital conservation buffer (CCB) under adverse scenario 1. Four banks may require dipping into the CCB under adverse scenario 2. This is, however, subject to the stakeholders not infusing any further capital into these banks, the report added.

Adverse scenario 1 assumes that a gradual slowdown in global growth would lead to a gradual drop in domestic GDP growth and a moderate rise in domestic inflation over time leaving the RBI limited space to ease policy rates to boost growth.

Adverse scenario 2 assumes that global trade uncertainties would result in a sharp dent in domestic growth, inflation would rise beyond the tolerance band of 6% and the central bank would tighten monetary policy.

"Stress tests indicated relatively higher depletion in the capital of public sector banks as compared to private banks and foreign banks," the report said.

Six banks with a share of 15% in scheduled commercial banks' total assets could potentially breach the regulatory minimum level of CRAR under a severe shock, it added.

Asset quality of public vs private banks

Public sector banks, who accounted for 54.1% SCBs' loans, continued to contribute more than three-fifth share in gross NPAs. This share has, however, continuously declined with corresponding rise in the share of private banks over the last year.The half-yearly slippage ratio remained stable at 0.7%, though it increased marginally for private banks. The provisioning coverage ratio of public sector banks continued to increase, while it declined for private and foreign banks in September 2025.

Write-off ratio decreased for public sector banks, while it shot up in case of private and foreign banks in the current financial year, the RBI report said.

Credit quality of large borrowers

As a positive for the banking system, the RBI study has found that the concentration of the top-100 borrowers waned in the last two years.

The share of large borrowers in total credit of SCBs remained steady at around 44%, but their share in gross NPAs declined significantly over the past few years to 33.8% as of September 2025.

NII and NIM

From an earnings perspective, the RBI report said the growth in the core net interest income declined sharply to 2.3% in September 2025 across all bank groups, amid sharp rate cuts by the central bank. This impacted the profit growth of banks.

The net interest margin (NIM) recorded a broad-based 0.20% fall in September 2025 over March 2025 due to a relatively higher decline in yield on assets than in cost of funds, it added.