India Banks Strengthen Foundations - But Climate Risks Loom

India’s banking sector is entering 2026 from a position of notable strength, with fresh data from the Reserve Bank of India (RBI) showing that bad loans have fallen to their lowest level in decades and balance sheets remain robust despite moderating profit growth.

The central bank’s latest Trend and Progress of Banking report, released on Monday, shows that gross non-performing assets fell to 2.1 percent at the end of September 2025, compared with 2.2 percent six months earlier. The decline extends a multi-year improvement in asset quality across the financial system.

According to the RBI, retail loan portfolios have also strengthened, including segments such as housing, education and credit cards. However, it cautioned that pockets of stress remain in certain categories.

Consumer durables continued to carry the highest bad loan ratios among retail products, while the leather and leather goods industry showed the highest stress levels within overall industrial lending.

Banks have curtailed consumption-oriented lending in recent years, scaling back credit for personal loans, credit cards, consumer durables and vehicles.

Concerns over a jump in small-ticket personal loans had prompted the RBI to tighten regulations in late 2023, although some of those measures were eased earlier in 2025 as pressures stabilised.

Non-bank finance companies also showed improving asset quality during the 2024-25 period, supported by sustained double-digit balance sheet growth.

The RBI noted that the sector’s risk indicators have steadily improved, suggesting a broad-based strengthening of credit performance across India’s financial system.

Despite the positive trends, the report highlights that profit growth at banks has begun to moderate.

Deposits and credit expanded at double-digit rates during the year but at a slower pace than in the previous period.

Lower interest margins weighed on overall profitability, even as lenders continued to operate with strong capital and liquidity buffers.

The RBI emphasised that banks remain well-capitalised, with leverage and liquidity metrics comfortably above regulatory thresholds.

These fundamentals, it said, provide “a buffer against risks and support the banking sector’s capacity to sustain credit expansion” in the face of ongoing economic uncertainty.

Looking ahead, the central bank devoted significant attention to the rising threat of climate change to India’s financial stability.

It revealed that work is under way to construct a national information system capable of identifying climate-related risks, part of a broader effort to build a structured climate-risk disclosure framework for the country’s financial institutions.

The RBI stressed that climate finance must become a shared priority across regulators, financial institutions, governments and global partners.

As physical risks and transition risks intensify, the central bank said coordinated action will be essential to safeguarding India’s economic resilience while supporting investment in climate adaptation and mitigation.

With asset quality at historic lows and capital positions strong, India’s banks enter the new year with considerable momentum.

Yet the looming pressures from climate change suggest that the next phase of stability will require not only prudent credit management but also a system-wide approach to emerging environmental risks.