NEW DELHI: Indian banks are in their best shape in a decade, with non-performing assets (NPAs) near historic lows and balance sheets strengthened by robust capital buffers, Motilal Oswal Financial Services Ltd said in a post on social media platform X.
The financial services firm highlighted the significant improvement in the health of the banking sector, pointing to cleaner balance sheets and stronger fundamentals as key factors supporting the outlook for Indian banks. “Indian banks are in their best shape in a decade. NPAs are near historic lows”, Motilal Oswal said in its post on X.
The assessment comes against the backdrop of a sustained improvement in asset quality across the banking system. According to recent banking-sector data, gross non-performing assets of scheduled commercial banks fell to a multi-decadal low of around 1.8 per cent in March 2026, while net NPAs stood at about 0.4 per cent. Capital adequacy also remained comfortable.
Motilal Oswal’s assessment underlines how the banking sector has emerged stronger after a prolonged clean-up of stressed assets and balance-sheet repair. The improvement in asset quality has also been accompanied by stronger profitability and adequate capital, providing banks with greater capacity to support credit growth.
The firm’s observations are broadly in line with the Reserve Bank of India’s assessment of the banking system. The central bank’s latest Financial Stability Report showed that banks remained resilient, with strong capital buffers and the ability to withstand severe stress scenarios.
Indian banks are in their best shape in a decade.
NPAs are near historic lows. Profits are strong. Capital is comfortable.
Yet banks are asking RBI for accounting relief.
Why?
Because one rule starting April 2027 could create a Rs.60,000+ crore shock.
Here’s an interesting…
— Motilal Oswal Financial Services Ltd (@MotilalOswalLtd) August 22, 2026
Motilal Oswal has also pointed to the implications of stronger bank balance sheets for the broader credit cycle. With NPAs at historically low levels and capital positions remaining healthy, banks are better placed to expand lending while maintaining prudent underwriting standards.
The improvement in asset quality marks a sharp turnaround from the stress witnessed during the previous decade, when elevated corporate leverage and mounting bad loans weighed on bank profitability and constrained credit growth.
The firm’s bullish assessment also comes as credit growth has regained momentum. System-wide bank credit growth accelerated to 14.5 per cent year-on-year during 2025-26, while deposit growth stood at 11.5 per cent, according to data cited in recent assessments of India’s financial system.
Motilal Oswal’s view suggests that the banking sector could remain an important beneficiary of the improving credit cycle, particularly as healthier corporate balance sheets and sustained economic activity support demand for loans.
According to a report by Goldman Sachs. Indian banks will likely maintain benign asset quality trends, with deleveraging in unsecured lending limiting incremental stress and the West Asia crisis having minimal impact on asset quality.
According to the report, the outlook for asset quality of Indian banks has improved significantly over the past five years, with overall stress remaining contained. Moreover, the concerns have largely been limited to granular unsecured loans — particularly in the consumer unsecured and microfinance (MFI) segments.
“In our view, aggressive lending in these segments drove over-leveraging and triggered the non-performing loan (NPL) cycle; however, this impact was largely restricted to mid-sized private banks,” GS noted, adding “State-Owned Enterprise (SoE) banks had no exposure to this segment, while large private banks experienced negligible to manageable impacts.”
Further, the risk of fresh bad loans in these segments remains low, supported by significant deleveraging over the past 12-18 months. The MFI loan book has contracted 25 per cent from its peak of Rs 4.4 trillion in QE-Mar-24, while consumer unsecured loan growth slowed to 10-12 per cent in FY25/FY26 from 25-30 per cent in FY23/FY24.
Despite this moderation, consumer credit remains structurally underpenetrated in India, with unsecured loans accounting for only 18 per cent of the overall retail loan book, GS noted. In MFI, around 80-90 per cent of the loan book at several banks is now covered by the government-backed Credit Guarantee Fund for Micro Units (CGFMU), providing a cushion against any sharp increase in NPL formation.
“The primary incremental debate regarding asset quality centers on MSME loans,” as per GS. It noted that the segment has grown at a CAGR of around 20-25 per cent over the past three to five years, raising concerns over potential asset quality stress. However, GS remains relatively less concerned, noting that banks have not moved down the risk curve and a significant portion of MSME lending is backed by adequate collateral.
Meanwhile, it flagged that while “MSME loans have grown at a faster pace,” the sector can witness pressure “if the impact of the West Asia crisis or El Nino proves more severe than expected.” (ANI)
