India’s Banking Sector Thrives with Record Asset Quality Improvements
A notable enhancement in the asset quality of Scheduled Commercial Banks (SCBs) has been highlighted in the Economic Survey 2025-26, presented today in Parliament by Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman. The survey reveals that both the gross non-performing asset (GNPA) ratio and net NPA ratio have reached their lowest levels in decades. The capital-to-risk-weighted-asset ratio (CRAR) of SCBs stands strong at 17.2% as of September 2025. This upward trajectory is further bolstered by a significant increase in the recovery rate for NPAs, which has nearly doubled from 13.2% in FY18 to 26.2% in FY25, with notable improvements through the Insolvency and Bankruptcy Code, 2016.
Support for MSMEs and Economic Growth
The Union Budget for 2025-26 has introduced vital measures enhancing credit availability for Micro, Small, and Medium Enterprises (MSMEs). Notable initiatives include guarantee cover for MSMEs, the rollout of credit cards for micro-enterprises, and an updated MSME classification that raises the investment limits and turnover thresholds. These actions have sustained robust momentum in bank credit to the MSME sector.
Encouraging Trends in Regional Rural Banks
According to the Economic Survey, the government has implemented strategies to enhance the performance of Regional Rural Banks (RRBs). A significant restructuring reduced their numbers from 196 to just 28 by consolidating them based on the One-State-One-RRB principle. These efforts have paid off, with RRBs recording exceptional financial health and achieving a consolidated net profit of ₹7.6 thousand crore in FY24 and ₹6.8 thousand crore in FY25. Moreover, RRBs have consistently surpassed the priority sector lending target, which mandates that 75% of their adjusted net credit be allocated to priority sectors.
Innovations in Credit Assessment
The Economic Survey indicates that public sector banks (PSBs) launched a cutting-edge credit assessment model (CAM) in 2025. This model utilizes digital footprints to evaluate MSME loan applications. Between April 1 and November 30, 2025, PSBs sanctioned over ₹3.2 lakh crore in MSME loans. The innovation aims to facilitate easier loan processing and integrates existing credit guarantee schemes.
Microfinance Sector Growth
The microfinance sector, which predominantly serves rural and female clientele, has seen substantial growth over the past decade. Active borrowers have surged from 33 million in FY14 to 62.7 million in FY25, with total loan portfolios increasing almost sevenfold. However, the sector’s future success hinges on strengthening credit assessment tools and promoting responsible lending practices.
Advancements in Financial Inclusion
India’s financial inclusion journey has made remarkable progress, with the Pradhan Mantri Jan Dhan Yojana opening 550 million accounts by March 2025. Various credit-oriented schemes are now filling gaps for underserved populations, contributing to a significant leap in bank account ownership. The Financial Inclusion Index also reflects this growth, improving from 64.2 in March 2024 to 67.0 in March 2025.
The Impact of the Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code (IBC) has established a coherent framework for corporate distress resolution in India, leading to improved credit discipline and reduced NPAs. Analysis indicates that creditors recovered ₹3.99 lakh crore from 1300 resolved cases, demonstrating significantly better outcomes compared to liquidation processes. S&P Global Ratings has upgraded India’s insolvency framework, recognizing enhancements in recovery rates and reduced resolution timelines.
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