RBI’s Financial Stability Report: Risks policymakers shouldn’t overlook

RBI’s June 2025 Financial Stability Report highlights India's improving banking health. However, rising household and public debt, and rapid unsecured retail lending point to potential risks amid uncertainties

By Uday Raj Singh

The Reserve Bank of India’s Financial Stability Report (FSR), released on June 30, paints a broad picture of India’s finance sector, yet leaves readers with important questions about emerging risks that policymakers should not ignore.

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The country’s banking system looks robust on paper, but the RBI’s latest report reminds us that stability isn’t something to be taken for granted.

The headline numbers are reassuring — bad loans have edged down, capital adequacy remains healthy, and stress tests suggest banks can cope with severe economic shocks or fluctuations.

According to the report, the gross non-performing assets (GNPA) ratio for scheduled commercial banks dropped to 2.8 per cent in March 2025, the lowest in over a decade and down from 3.2 per cent last year. This decline reflects years of clean-up, improved credit discipline, and healthier balance sheets.

Meanwhile, the capital-to-risk weighted assets ratio (CRAR) remains robust at 16.8 per cent, comfortably above regulatory requirements, ensuring banks have a solid cushion to absorb shocks.

Stress tests run by the RBI suggest that even under an adverse macroeconomic scenario, GNPA ratios could rise to around 4.4 per cent, still manageable given the current capital strength.

Another encouraging sign comes from urban cooperative banks. Long viewed as the system’s weak link, they too reported progress, with their GNPA ratio improving to 9.4 per cent from 10.2 per cent a year ago.

Yet, dig a little later, and the report flags risks that deserve attention. One notable concern is that India’s public debt remains above 81 per cent of the GDP, limiting the government’s fiscal space to respond if fresh global or domestic shocks arise.

Retail lending, especially unsecured prsonal loans, has expanded rapidly — ballooning by 23 per cent year-on-year — raising the risk of repayment strain if economic conditions change.

Add geopolitical tensions, a volatile global market, and high asset valuations at home, and the picture starts to look more complicated.

Household debt itself now stands at roughly 39 per cent of the GDP, historically high for India, though still lower than in advanced economies.

The RBI isn’t sounding an alarm, but it is sending a message: the Indian economy remains a global bright spot, but credit growth needs to be balanced with discipline. Banks and NFBCs will have to stay watchful, especially as household debt climbs to record levels.

The broader takeaway is that India’s financial sector is in a better place than it was a few years ago, but the work of keeping in that way never stops. As global uncertainty lingers, and domestic lending patterns evolve, staying vigilant will matter as much as celebrating the gains.

At a time when numbers look good, it’s worth remembering that risk often hides in the details, and stability has to be managed, not assumed.

(The writer is a researcher)