India’s banking sector has recorded a sharp improvement in asset quality and credit recovery, with the non-performing asset (NPA) recovery rate of scheduled commercial banks (SCBs) nearly doubling to 26.2% in FY25 from 13.2% in FY18, according to the Economic Survey 2025-26 tabled in Parliament today by the Union Finance Minister Nirmala Sitharaman.

The Survey said gross non-performing assets (GNPAs) and net NPAs have fallen to multi-decadal and record-low levels, reflecting sustained balance sheet repair across the banking system. Capital adequacy also remained robust, with the capital-to-risk-weighted assets ratio (CRAR) of SCBs standing at 17.2% as of September 2025.

Recovery through the Insolvency and Bankruptcy Code (IBC) has strengthened significantly, contributing to improved credit discipline and lower stressed assets. Since its inception in 2016, the IBC has delivered superior outcomes compared with liquidation, with creditors realising ₹3.99 lakh crore from around 1,300 resolved cases, the report noted.

The Survey highlighted strong momentum in credit flow to micro, small and medium enterprises (MSMEs), supported by policy measures announced in the Union Budget 2025-26. These include enhanced credit guarantee cover, the introduction of credit cards for micro-enterprises, and a revision in MSME classification with higher investment and turnover thresholds.

“Measures announced in the Union Budget 2025-26, such as a significant enhancement of credit availability with guarantee cover for MSMEs, the introduction of credit cards for micro-enterprises, and others, have also been beneficial to the sector,” the report highlighted.

As per the Survey report, public sector banks (PSBs) have also rolled out a new credit assessment model (CAM) based on digital footprints for MSMEs. Between April 1 and November 30, 2025, PSBs sanctioned loans worth over ₹41,500 crore under the CAM framework, leveraging digitally verifiable data for automated loan appraisal and integrating credit guarantee schemes such as CGTMSE.

Regional Rural Banks (RRBs) showed marked improvement following consolidation under the ‘One State-One RRB’ principle, which reduced their number from 196 to 28 by May 2025. RRBs posted a record consolidated net profit of ₹7,600 crore in FY24 and ₹6,800 crore in FY25, while consistently exceeding the priority sector lending target of 75%, the Survey noted.

The Economic Survey also pointed to continued expansion in microfinance and financial inclusion. Active microfinance borrowers nearly doubled over a decade to 627 lakh in FY25, while the sector’s loan portfolio grew seven-fold to ₹2.38 lakh crore. Women account for 95% of borrowers, with rural customers forming 80% of the base.

Financial inclusion indicators continued to strengthen, aided by schemes such as PM Jan Dhan Yojana, PM Mudra Yojana, Stand-Up India and PM SVANidhi, alongside the rapid adoption of UPI. The RBI’s Financial Inclusion Index rose to 67.0 in March 2025 from 64.2 a year earlier.

As per the report, S&P Global Ratings upgraded India’s insolvency regime to ‘Group B’ in December 2025, citing higher recovery rates and faster resolution timelines under the IBC.