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Informist, Tuesday, Jan. 6, 2026

NEW DELHI – The Indian banking sector is likely to experience lower systemic risks and better operating environment under the Reserve Bank of India's enhanced regulatory oversight, according to Fitch Ratings. The banking regulator's package of 21 reforms--announced in October--along with the policy measures from the last five years is likely to play a key role in further improving the sector's resilience. 

"Key steps since 2019 include the withdrawal of regulatory asset quality forbearance, the implementation of large-exposure frameworks, the introduction of capital requirements that exceed Basel III standards, and enhanced supervisory enforcement," Fitch Ratings said in a release. These steps, along with the implementation of the RBI's Expected Credit Loss framework from Apr. 1, 2027, should allow banks to provision more effectively through the risk cycle, the release said. 

The draft Expected Credit Loss norms mandate banks to set aside more funds for potential bad loans. As per the norms, banks also have to classify their non-performing assets into three categories based on the period for which the assets have remained non-performing and the "realisability of the dues", while continuing to apply existing rules for classifying non-performing assets.

"We think banks are better positioned to monitor and control loan risks," Fitch said. "The Central Repository of Information on Large Credits, established in 2014, has been effective in containing risks associated with large corporate loans, while improved retail credit bureau data access and reporting has reduced risk of a significant build-up of retail stress."

The Indian banking sector's metrics are at their strongest, with the non-performing loan ratio falling to 2.2% in the first half of the current financial year from a peak of 11.2% in 2017-18 (Apr-Mar) and the common equity Tier 1 ratio rising to 14.8%, from Fitch's estimate of 9.3% in FY14. Meanwhile, the risk profile of Indian corporate borrowers has deleveraged, with median debt/equity falling to 43% in FY25, from 73% in FY17, according to the RBI data.

Over the medium term, India's economic growth, likely above 6% over the next two years, should continue to offer banks ample opportunities for profitable lending growth. "We estimate the banking sector credit/GDP ratio at 59% in 2025, which remains below the peer average of 101%, suggesting there is headroom for lending growth to exceed nominal GDP growth moderately over the medium term without posing major risks to systemic stability, if underwriting standards hold up," Fitch said.

Banks should also benefit from the strong macroeconomic stability in India. "We expect consumer price inflation to average 4.0–4.5% in the next few years, down from about 5% in 2015-2024, while India's low export dependence mitigates US tariff risks," the rating agency said. "Large foreign-exchange reserve buffers also serve to reduce the economy's exposure to external shocks."

Against this backdrop, Fitch said an upgrade to India's bank operating environment could lift the standalone credit strength of Indian lenders, with private banks most likely to see rating upgrades. Public sector banks may see limited benefit as their ratings remain anchored to government support.  Ens

Reported by Krity Ambey

Edited by Akul Nishant Akhoury

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