India’s economy is witnessing robust growth, supported by strong domestic demand, low inflation, and healthy bank balance sheets, as indicated in the Reserve Bank of India’s (RBI) December 2025 Financial Stability Report (FSR). While the financial system remains resilient, the RBI has cautioned about potential risks associated with unsecured lending, fintech exposure, and external uncertainties. The report sheds light on key trends in economic growth, banking health, and emerging financial risks.
Positive Growth Outlook
The RBI’s report shows a favorable growth trajectory for India’s economy, with real GDP growth surpassing expectations in the first half of the fiscal year 2025-26. The economy recorded impressive growth rates of 7.8% in the first quarter and 8.2% in the second quarter. This growth is primarily driven by strong private consumption and increased public investment. The central bank maintains an optimistic outlook, attributing this to factors such as low inflation, favorable financial conditions, an above-normal monsoon, tax reforms, and the ongoing expansion of digital public infrastructure. Collectively, these elements contribute to a stable economic environment that fosters confidence among investors and consumers.
Banking Sector Health Improves
The health of scheduled commercial banks in India continues to improve, as highlighted in the RBI report. Banks are sustaining strong capital and liquidity buffers, which have enhanced asset quality and maintained robust profitability. As of September 2025, the gross non-performing assets (GNPA) ratio reached a historic low of 2.1%, with projections suggesting a further decline to 1.9% by March 2027 under a baseline scenario. However, the RBI warns that in adverse stress scenarios, the GNPA ratio could rise to between 3.2% and 4.2%. The report emphasizes the need for vigilance in monitoring asset quality, especially amid potential economic fluctuations.
Adequate Capital Buffers
From a capital perspective, the RBI report indicates that the capital to risk-weighted assets ratio (CRAR) remains strong. As of September 2025, public sector banks reported a CRAR of 16%, while private sector banks recorded 18.1%. However, the aggregate CRAR for 46 major scheduled commercial banks is expected to decline slightly from 17.1% in September 2025 to 16.8% by March 2027 under the baseline scenario. In adverse hypothetical scenarios, this ratio could fall to 14.5% and 14.1%. Stress tests revealed that public sector banks might experience a relatively higher depletion in capital compared to their private and foreign counterparts. Notably, six banks, which account for 15% of total banking assets, could breach the regulatory minimum CRAR under severe economic shocks.
Concerns Over Unsecured Lending
The RBI has identified unsecured loans as a major factor contributing to retail loan slippages. More than half of these slippages are linked to unsecured products, such as personal loans and credit cards. Specifically, unsecured loans constituted 53.1% of total retail loan slippages, with private sector lenders experiencing a higher share of new slippages. For private banks, unsecured loans represented nearly 76% of slippages, compared to 15.9% for public sector banks. The overall GNPA ratio for unsecured retail loans stands at 1.8%, while for total retail advances, it is 1.1%. This trend raises concerns regarding the sustainability of unsecured lending practices and their potential impact on the financial system.
Fintech Lending Under Scrutiny
The report also highlights the increasing role of fintech firms in the lending sector, particularly concerning unsecured loans. The RBI has flagged elevated impairment levels among borrowers who have taken unsecured loans from multiple lenders. Unsecured loans make up over 70% of fintechs’ total loan portfolios, with over half of these loans extended to borrowers under the age of 35. Between September 2024 and September 2025, fintech lending increased by 36.1%, primarily driven by personal loans. This rapid growth raises questions regarding the regulatory framework governing fintech lending and the risks associated with high levels of unsecured borrowing.
Risks Posed by Stablecoins
A special feature of the report addresses concerns regarding the widespread adoption of stablecoins, warning that they could pose significant risks to India’s monetary sovereignty and financial stability. The RBI noted that foreign currency-denominated stablecoins might undermine monetary control, weaken the transmission of monetary policy, and complicate capital flow management, especially for emerging economies like India. The bank emphasized the necessity of maintaining central bank money as the ultimate settlement asset and underscored the potential benefits of central bank digital currencies in enhancing efficiency while preserving trust in the monetary system.
Rupee Faces Challenges
The report further notes that the Indian rupee has depreciated against the US dollar due to various factors, including falling terms of trade, high tariffs, and a slowdown in capital flows. Despite a general weakening of the US dollar against other major currencies, the rupee’s decline is attributed to India’s effective US tariff rate being higher than that of its trading partners. This situation highlights the challenges the Indian economy faces in navigating external pressures while striving for sustained growth and stability.
Digihunt is not a financial advisor and this is not investment advice.