RBI FSR 2026: Banks’ GNPA Seen Under 2% Baseline

RBI flags low bad-loan ratio, but stress risks remain

The Reserve Bank of India’s (RBI) latest Financial Stability Report (FSR) suggests Indian banks are entering the next few years with asset quality near multi-decade lows. The report says the combined gross non-performing assets (GNPA) ratio is expected to remain under 2% for three years under a baseline scenario. That projection comes even as the RBI highlights a challenging global environment and the possibility of macroeconomic shocks. The key takeaway is that the system is currently stable, but the trajectory can change quickly if growth slows and inflation rises.

What the RBI said in the Financial Stability Report

The FSR said the aggregate GNPA ratio for a set of 46 banks could edge up from 1.8% in March 2026 to 1.9% by March 2028 under the baseline scenario. It also laid out severe stress outcomes, where GNPAs could rise to 3.8% and 4.1% by March 2028 under adverse scenarios. The RBI noted that the baseline scenario is derived from the latest forecasts for macroeconomic variables. Under severe stress, the assumptions include a marked slowdown in growth and higher inflation. The report’s message is that the baseline remains benign, but the tail risks are meaningful.

Why the baseline remains steady

The RBI described the overall financial system as resilient, supported by strong bank and non-bank balance sheets. It said scheduled commercial banks remain stable because of strong capital and liquidity buffers, improving asset quality, and steady profitability. In the report’s framing, these buffers help explain why the baseline GNPA projection stays near current levels. Banks have benefited from a long decline in bad loans over the past several years, with the gross NPA ratio of scheduled commercial banks continuously declining over the last eight financial years, according to the RBI’s data cited in related coverage. The combination of improved asset quality and stronger balance sheets is central to the baseline outlook.

Stress tests show the range of possible outcomes

While the baseline points to a small uptick by March 2028, the RBI’s stress tests show a much wider range under adverse macroeconomic conditions. The report states that under severe stress scenarios, gross NPAs could rise to 3.8% to 4.1% by March 2028. In another set of projections cited from the FSR, the aggregate GNPA ratio of 46 banks may improve from 2.1% in September 2025 to 1.9% in March 2027 under the baseline scenario, but could rise to 3.2% and 4.2% under adverse scenarios 1 and 2. These stress paths are not presented as forecasts, but as outcomes under specified shocks.

A look at the recent trend in bank asset quality

The RBI and related summaries cited multiple recent reference points showing the downtrend in bad loans. One data point said gross NPAs fell to 2.1% in the September 2025 quarter, down from 2.5% a year earlier, and far below a peak of 11.5% seen in 2017–18. The RBI also reported provisional domestic-operations GNPA of 2.15% as on 30 September 2025. Breakdowns cited alongside that figure put gross NPA ratios at 2.50% for public sector banks (PSBs), 1.73% for private sector banks (PVBs), and 0.80% for foreign banks, as of 30 September 2025 for domestic operations. These datapoints help explain why the baseline stress-test outcomes start from a position of strength.

What this means for investors and the market

For equity investors and bondholders, the RBI’s baseline suggests that asset-quality pressures may not be the central risk in the near term, given the projected GNPA staying under 2%. But the stress outcomes matter because they set expectations for how much deterioration could occur under a sharp macro setback. The report also said stress tests showed banks remain capable of absorbing potential shocks, with capital ratios expected to stay comfortably above regulatory requirements even under adverse scenarios. This becomes important in assessing whether a rise in bad loans would translate into a system-wide capital problem, or remain a manageable credit-cycle swing. The RBI’s emphasis on capital and liquidity buffers points to the latter under the scenarios it modelled.

Key numbers from the FSR projections

Another stress-test snapshot cited in related coverage

Separate reporting linked to the FSR also cited a different set of stress-test numbers, stating that aggregate gross NPAs at 46 large commercial banks were expected to rise to 2.5% over the next two years from 2.3% at the end of the fiscal year that ended on March 31. The same coverage said the aggregate gross NPA could go as high as 5.6% in one of the two adverse scenarios, and another summary cited adverse scenario outcomes of 5.6% and 5.3%. Because these figures appear alongside the FSR references, they underline how outcomes can vary across samples, start dates, and scenario definitions, even when the central message remains consistent. The recurring theme is that baseline paths are mild, while adverse paths are materially higher.

Conclusion: baseline stability, but the stress range is wide

The RBI’s Financial Stability Report sets out a baseline where the banking system’s gross bad-loan ratio remains below 2% through the projection window, with only a marginal rise by March 2028 in one key estimate. At the same time, its stress tests show that a sharp slowdown in growth combined with higher inflation could push GNPAs notably higher. The RBI’s assessment of strong buffers and capital staying above regulatory requirements is a critical stabiliser in these scenarios. The next checkpoints for markets will be subsequent RBI updates and the next round of system-wide stress-test results that refine these trajectories.