India’s banking sector stays strong as Moody’s sees NPLs steady at 2–3% despite global headwinds

India’s banking sector is expected to maintain a strong footing over the next year, with system-wide non-performing loans (NPLs) remaining in check at around 2–3%, according to a fresh report by Moody’s Ratings.

Despite global economic uncertainties driven by trade tensions, Moody’s noted that India’s domestic economic momentum will continue to support growth, helping banks preserve asset quality. “We expect the system-wide non-performing loan (NPL) ratio to remain at 2%–3% in the next 12 months, compared to 2.5% at the end of December 2024,” the ratings agency said in its report released Tuesday.

The resilience of the Indian banking system is largely attributed to strong government capital spending, recent tax relief for middle-income groups, and easing monetary policy—all of which are expected to sustain consumption and investment activity.

Importantly, Moody’s observed that India's low reliance on global goods trade insulates it from some of the risks affecting other major economies. “Government capital expenditure, tax cuts for middle-class income groups to boost consumption, and monetary easing will underpin the Indian economy. Also, a low level of dependency on goods trade will shield it from external risks to an extent,” the report said.

Wholesale loans continue to be a bright spot in Indian banks’ portfolios. The report pointed out that the quality of wholesale loans will remain healthy as companies maintain good profitability and low levels of leverage. These loans form a major chunk of loan books, alongside the retail and agriculture segments.

However, Moody’s flagged concerns over unsecured retail loans, stating that asset quality will remain weaker in this category for the foreseeable future. “New NPL formation rates for secured retail loans have broadly stayed low, while those for unsecured loans have risen in the past few quarters,” the report said. Smaller private banks are expected to bear the brunt of this trend, with asset quality pressures likely to be more visible compared to their larger peers and public sector banks.

On the policy front, the Reserve Bank of India (RBI) continues to proactively ensure financial and price stability in the system. Easing inflation has allowed the RBI to turn accommodative. During January–March 2025, the RBI injected about ₹6.9 lakh crore of liquidity. As a result, the banking sector's net liquidity stood at a surplus of ₹1.7 lakh crore in early April 2025. The central bank also lowered the benchmark repo rate to 6% from 6.5% at the beginning of 2025, which will gradually cascade down to rates for bank loans and domestic bonds, improving borrowers' debt serviceability over time,” the report noted.

Summing up, Moody’s maintained a positive outlook for Indian banks, despite sectoral variations in loan performance. “Trade tensions pose risks for the global economy. Yet, the Indian banking sector will be able to broadly preserve asset quality as domestic economic conditions remain supportive of growth,” the report said.