RBI FSR: Bad loans seen under 2% till 2028

What the RBI’s latest stability signals mean

India’s central bank has reiterated that the economy and financial system remain resilient even as global risks stay elevated. RBI Governor Sanjay Malhotra, in the foreword to the Financial Stability Report (FSR), said the system has shown resilience despite external shocks. The FSR’s core message for lenders is that asset quality could remain strong in a baseline environment, but the stress-test tail risks remain meaningful.

For markets, the headline is the projected path of banks’ combined gross bad loan ratio. The RBI’s baseline scenario keeps the system-wide gross non-performing assets (GNPA) ratio under 2% over the next three years. But under severe stress assumptions, the projected GNPA ratio rises sharply, underscoring the sensitivity to a material growth slowdown and higher inflation.

FSR stress tests: how the RBI frames the risk

The FSR uses stress tests to estimate how bank balance sheets might behave under different macroeconomic paths. In the RBI’s framing, a gross bad loan ratio below 2% is considered healthy. The report’s baseline outlook, therefore, is anchored in an expectation of lenders staying broadly within what it considers a comfortable zone.

At the same time, the severe stress scenarios serve as a reminder that the GNPA ratio is not immune to adverse conditions. These scenarios assume a marked slowdown in growth and higher inflation. The RBI has positioned these as risk cases rather than its central expectation.

Baseline scenario: GNPA projected near current levels

In the baseline scenario, the RBI expects the combined gross bad loan ratio to remain under 2% for three years. The report noted that the GNPA ratio stood at 1.8% at end-March 2026. It projected that the ratio could inch up to 1.9% by end-March 2028.

The numbers indicate limited deterioration from current levels in the baseline case. The implied message is that the system is entering this period with a cleaner book than in many prior cycles. For credit markets and bank investors, the baseline projection supports the case that the NPA cycle is not expected to turn abruptly higher without a material shock.

Severe stress: GNPA could rise to 3.8%–4.1%

The same FSR also lays out a more adverse trajectory if macro conditions worsen sharply. Under severe stress scenarios, the report said gross NPAs could rise to between 3.8% and 4.1% by March 2028. The RBI described these severe scenarios as assuming a marked slowdown in growth combined with higher inflation.

This range is meaningfully above the baseline and highlights the convexity of credit risk in downturns. Even if banks are currently reporting low GNPA ratios, the stress path shows how quickly headline asset quality metrics can change when the broader environment turns against borrowers.

NBFCs: 15 entities flagged in a severe credit stress case

Alongside banks, the RBI also pointed to potential vulnerabilities in the non-bank space under severe conditions. According to the RBI’s stress tests, 15 NBFCs could fall below the minimum capital requirements under a severe credit stress scenario.

While the RBI did not provide additional identifiers in the provided details, the headline is important because NBFCs are closely linked to credit intermediation in segments such as retail and small businesses. The stress-test signal does not imply an outcome, but it provides a quantified risk marker for supervisors and markets.

Economy backdrop: growth strong, momentum supported by demand

The RBI has continued to emphasise domestic resilience even as the global environment remains challenging. It noted that India’s economy grew by 7.8% in the fourth quarter of 2025-26, supported by strong private consumption and fixed investment. The central bank also pointed to high-frequency indicators for the first two months of 2026-27, which suggest economic momentum has remained strong.

In its broader messaging, the RBI has highlighted India’s sustained high growth, well-anchored inflation expectations, continued fiscal consolidation, a manageable current account balance, and adequate foreign exchange reserves. It has also said steady foreign direct investment inflows and comfortable forex reserves are supporting external sector resilience.

Inflation watch: controlled, but monsoon risks remain on the radar

On prices, the RBI noted that consumer price inflation increased in May but remained broadly under control. The central bank also flagged that an adverse south-west monsoon, if it materialises, could pose risks to both growth and inflation.

This matters for financial stability because inflation surprises can tighten financial conditions and affect borrowers’ repayment capacity. For banks and NBFCs, a weaker agricultural outcome can also spill over into rural demand and cash flows, depending on the extent and duration of the shock.

External risks: West Asia conflict and global volatility

The RBI has warned that geopolitical risks remain relevant for the domestic outlook. It said the ongoing West Asia conflict poses risks to domestic growth and inflation in the short run, even as the economy is expected to be resilient in 2026-27 (FY27). It also reiterated that elevated energy and commodity prices can be a transmission channel from global events into the domestic economy.

The RBI has separately said India’s foreign exchange reserves and strong fundamentals will help cushion against external shocks and volatility in global markets. This cushioning, however, does not remove the need for vigilance on inflation and liquidity if external conditions worsen.

What this means for bank investors and credit markets

For equity and bond investors tracking banks, the baseline GNPA projection helps set expectations that the system’s headline asset quality may remain stable through March 2028. But the severe-stress trajectory is equally relevant because it outlines the downside sensitivity if macro conditions shift.

The RBI’s broader narrative also keeps financial stability at the centre of policy attention. It has highlighted stable system liquidity conditions and continued double-digit bank credit and deposit growth, alongside warnings about evolving risks. This combination typically implies a focus on ensuring that rapid credit expansion does not weaken underwriting standards.

Key figures from the RBI’s recent disclosures

Conclusion: stability message, with quantified downside risks

The RBI’s latest messaging combines confidence in domestic resilience with specific stress-test warnings on credit risk. The baseline scenario keeps the banking system’s GNPA ratio near 2% through March 2028, while severe stress paths show GNPA could rise to 3.8%–4.1%. With monsoon outcomes, geopolitical risks, and global inflation dynamics still in focus, markets are likely to watch future RBI updates for any change in the balance between resilience and risk in the stability assessments.