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India’s banking system remains stable with strong capital buffers, low bad loans and improving profitability, the Economic Survey 2025–26 noted on Thursday. The survey noted a significant improvement in the asset quality of scheduled commercial banks (SCBs), with both gross and net non-performing asset (NPA) ratios falling to multi-decadal and record low levels, respectively.

The process of recovering bad loans has experienced significant improvement throughout the passage of time. The NPA recovery rate increased from 13.2 percent in FY18 to 26.2 percent in FY25 which represents nearly double the initial value. The pace of new bad loans entering the banking system slowed sharply, with the slippage ratio dropping from 7.1 per cent in FY18 to 1.4 per cent in FY25 and further to 1.3 per cent in FY26 as of September 2025.

Loan recovery systems delivered better results, with the share of money recovered under the Insolvency and Bankruptcy Code rising from 28.3 per cent in FY24 to 36.6 per cent in FY25. Recoveries through the SARFAESI Act also improved during the same period, increasing from 25.4 per cent to 31.5 per cent. At the same time, banks remained financially strong, with enough capital buffers. The capital adequacy ratio of scheduled commercial banks stood at 17.2 per cent in September 2025, well above the level required by regulators.

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The improvement in asset quality was visible across most sectors. The gross NPA ratio for the industrial sector declined from 2.3 per cent in March 2025 to 1.9 per cent in September 2025. In the services sector, the ratio fell from 2.0 per cent to 1.8 per cent, while personal loans saw a marginal improvement from 1.2 per cent to 1.1 per cent.

In contrast, the agriculture sector continued to show relatively higher stress. The GNPA rato stood at 6.0 per cent in September 2025, marginally lower than 6.1 per cent in March 2025. The sector’s share in total NPAs increased from 34.6 per cent to 36.3 per cent over the same period

On profitability, the survey said profit after tax rose by 16.9 per cent year-on-year in FY25 and by 3.8 per cent year-on-year up to September 2025. Return on equity slipped slightly from 13.8 per cent in March 2024 to 13.6 per cent in March 2025, but remained on a steady upward trend since March 2020. Return on assets stayed stable at 1.4 per cent in March 2025 and stood at 1.3 per cent as of September 2025.

The survey showed that India maintained strong performance in its monetary and financial sectors throughout the fiscal year 2026 which lasted from April to December 2025. The Reserve Bank of India maintained an agile liquidity management approach which provided sufficient banking system liquidity while enabling effective money market and credit market operations.

The RBI reduced the repo rate and created permanent liquidity through Cash Reserve Ratio (CRR) reductions and Open Market Operations (OMO) because of decreasing inflation rates. The measures led to increased credit distribution and investment growth because scheduled commercial banks reduced their lending rates following the central bank's expansionary monetary policy.

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The survey reported that broad money growth increased beyond 12 percent during FY26 because banks successfully utilised the CRR liquidity that had been released. RBI's OMO purchases resulted in a total excess of approximately Rs 1.89 lakh crore which remained available through the Liquidity Adjustment Facility between FY26 and January 8 2026. The Economic Survey highlighted the RBI's landmark regulatory framework which the bank introduced in May 2025 through the establishment of a Regulatory Review Cell. The cell will review each regulation every five to seven years, signalling a shift towards proactive and forward-looking financial regulation aligned with global best practices.