India’s banking sector remains strong and well-capitalized, but rising stress in unsecured loans and global financial uncertainties could create risks in the near future, according to the Economic Survey 2025. Banks continue to perform well with healthy profits and capital buffers but concerns are growing over personal loans and credit card defaults, which now form a large portion of bad loans.
Banking Sector Strengthens, But Unsecured Loans a Growing Concern
The survey highlights a major improvement in asset quality, with gross non-performing assets (GNPAs) falling to 2.6% as of September 2024, the lowest level in 12 years. This decline reflects stronger loan recovery efforts and responsible lending practices by banks.
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However, the report raises concerns over the sharp rise in bad loans from unsecured personal loans and credit cards, which now account for 51.9% of fresh NPAs in retail lending. These loans are riskier because they are not backed by collateral, making them more vulnerable to defaults.
The RBI’s Financial Stability Report (December 2024) further warns that nearly half of people who have credit card and personal loan debt also have larger secured loans like home or vehicle loans. This increases financial stress, as a default on smaller loans can trigger defaults on bigger ones, affecting overall loan repayments.
RBI’s Attempts to Control Unsecured Loan Growth Have Limited Impact
The Reserve Bank of India (RBI) raised the risk weight on unsecured loans by 25 basis points in November 2023 to reduce the risk from growing unsecured lending. This measure was intended to slow down lending in riskier segments and encourage banks to be more cautious when giving personal loans and credit cards.
Despite these efforts, personal loans and credit card borrowing continue to rise due to strong consumer demand and the rapid growth of digital lending platforms. The Economic Survey warns that if this trend continues unchecked, it could create financial instability in the future. Housing loans remain the biggest contributor to overall credit growth but unsecured loans are expanding at a much faster rate, adding to financial system risks.
Banks Remain Financially Strong
Despite the concerns over unsecured loans, India’s banking sector remains well-capitalized and profitable:
The RBI’s stress tests confirm that Indian banks would be able to withstand economic shocks, ensuring the stability of the financial system even in uncertain conditions.
Global Financial Risks Could Impact India’s Banking Sector
The Economic Survey 2025 also warns of risks from global financial markets, particularly from the United States.
A major correction in the US stock market could reduce global liquidity, disrupt foreign investments in India, and weaken the Indian rupee. The Indian stock market (Nifty 50) is historically linked to the US S&P 500, meaning any major downturn in US markets could negatively impact investor confidence in India.
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The survey points out that geopolitical tensions, global inflation, and rising interest rates in advanced economies could slow down economic growth worldwide, affecting India’s ability to attract foreign capital and maintain financial stability.
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