Indian Banks See Sharp Improvement in Asset Quality

India’s banking system continues to show strong signs of recovery, with bad loans declining across most borrower segments. Latest data indicates that the stress seen during the pandemic and interest rate tightening phase has eased significantly. Improved collections, prudent lending, and stronger balance sheets are helping banks maintain stability, although some pockets still require close monitoring.

Why in the News?

The Reserve Bank of India released fresh data showing that gross non-performing assets (GNPAs) have fallen to a 10-year low. As of September 2025, banks asset quality improved across sectors, indicating reduced stress in the financial system.

Gross NPAs at Decadal Low

• According to RBI data, the GNPA ratio declined to 2.1%, the lowest level in a decade.
• This reflects fewer fresh bad loans and better recovery of stressed assets.
• The improvement suggests that the impact of post-pandemic disruptions and the interest rate cycle has largely subsided.
• Banks have also strengthened risk assessment and monitoring, helping contain new slippages.

Special Mention Accounts Show Decline

• Early stress indicators also improved.
• The Special Mention Accounts-2 (SMA-2) ratio, which tracks loans overdue by 61–90 days, declined to 0.8% by end-September 2025.
• This fall indicates that fewer accounts are slipping into non-performing status
• . Lower SMA levels point to healthier repayment behaviour and improving borrower cash flows.

Relief in MSME and Unsecured Loans

• Stress levels in the MSME sector eased, with the SMA ratio stabilising at 5.1%.
• Unsecured retail loans also showed significant improvement, as the SMA-2 ratio dropped to 13%, down from over 20% a year earlier.
• This moderation suggests better credit discipline and improved collection efficiency, though unsecured lending remains an area of caution.

Large Borrowers and Sectoral Trends

• Fresh stress among large borrowers declined sharply, with the SMA-2 ratio falling by nearly 36% in September 2025.
• Stress in sectors exposed to US tariffs remained relatively contained.
• Banks also reported better collection efficiencies in segments such as microfinance, although areas like micro-LAP, commercial vehicles, and affordable housing still require monitoring.

Background: Asset Quality Indicators

• Asset quality reflects a bank’s financial health and its ability to manage credit risk.
• Indicators such as GNPA and SMA ratios help regulators assess systemic stability.
• A sustained decline in bad loans improves banks’ profitability, reduces credit costs, and enhances their capacity to support economic growth through lending.

About Non Performing Assets

• A loan or advance where principal or interest remains overdue for more than 90 days

Classification of NPAs

(Based on duration of default)

• Substandard Assets: Assets classified as NPAs for 12 months or less
• Doubtful Assets: Assets remaining in the substandard category for more than 12 months
• Loss Assets: Assets identified as uncollectible & No longer considered bankable, though not fully written off

Key Summary At Glance

Question

Q. As per RBI data, India’s Gross Non-Performing Assets (GNPA) ratio stood at what level in September 2025?

A. 3.5%
B. 2.8%
C. 2.1%
D. 1.5%