Introduction: The Great Banking Turnaround
India’s banking sector has staged one of the most remarkable recoveries in its modern history.
Just a few years ago, headlines screamed of mounting NPAs (Non-Performing Assets), bank frauds, and bad loan write-offs.
Now, the same sector is posting record profits, clean balance sheets, and robust credit growth.
The country’s top lenders — from State Bank of India (SBI) to ICICI Bank, Axis Bank, HDFC Bank, and Canara Bank — are stronger than ever, having tamed the NPA monster that once haunted them.
But while the storm of bad loans has passed, a new kind of risk is quietly taking shape — one that’s less visible, but potentially just as dangerous.
💰 How the NPA Crisis Was Finally Conquered
The banking system’s biggest test came in the aftermath of the corporate lending spree of the 2010s.
Large infrastructure and industrial projects turned sour, and by 2018, India’s gross NPAs had touched nearly ₹10 lakh crore — about 11% of total advances.
Here’s how the turnaround happened:
- 1️⃣ Insolvency and Bankruptcy Code (IBC):
Introduced in 2016, it streamlined recovery and resolution processes.
Over ₹3.5 lakh crore worth of bad loans have been resolved under IBC so far. - 2️⃣ Government Recapitalization:
Between 2017 and 2021, the government pumped in more than ₹3 lakh crore into public sector banks to rebuild capital. - 3️⃣ Stricter Risk Assessment:
Lenders revamped credit appraisal systems, especially for corporate loans. - 4️⃣ Mergers and Consolidation:
PSB mergers (like BOB-Vijaya-Dena, SBI and associates) created stronger, more efficient entities. - 5️⃣ Technology and Analytics:
AI and big data now help detect early stress in borrower accounts — a big leap from the old manual systems.
📈 The Result: Clean Books, Record Profits, and Investor Confidence
India’s banking system today is far healthier than at any point in the last decade.
Gross NPAs have dropped from 11.2% in 2018 to just 3.1% in 2025, while net NPAs are below 0.7% — the lowest in over a decade.
Banking Snapshot (FY25):
| Metric | 2018 | 2022 | 2025 |
|---|---|---|---|
| Gross NPA Ratio | 11.2% | 6.9% | 3.1% |
| Net NPA Ratio | 6.2% | 2.3% | 0.7% |
| Sector Profit | ₹41,000 Cr | ₹1.5 Lakh Cr | ₹2.25 Lakh Cr+ |
| Credit Growth | 9% | 14% | 17% |
Every major bank has turned profitable, and public sector banks are now reporting multi-year highs in earnings.
The Nifty Bank Index has climbed over 25% year-to-date, with PSU banks leading the rally.
🏦 The New Era: From Corporate Lending to Consumer Banking
Having cleaned up their corporate loan books, banks are now focusing aggressively on retail lending — personal loans, credit cards, housing loans, and consumer finance.
Why?
Because retail lending offers higher margins, lower default history, and faster disbursement.
Digital platforms make onboarding seamless, and the Indian middle class’s appetite for credit is growing rapidly.
But as this retail boom gathers steam, experts warn:
“The next credit risk for India’s banks may come not from big corporations, but from individuals.”
⚠️ The New Risk: The Surge in Unsecured Retail Loans
In the last 24 months, India’s unsecured credit — mainly personal loans and credit cards — has grown at a blistering pace.
RBI data (FY25):
- Personal loans grew 27% YoY.
- Credit card outstanding jumped 92% since FY22.
- Short-term consumer loans under ₹50,000 surged 50% YoY.
This trend, though profitable now, has created a potentially volatile bubble in household credit.
💳 Retail Lending: Boon or Bubble?
Retail credit has been banks’ growth engine since 2022.
It’s convenient, diversified, and resilient — or so it seems.
Why banks love retail loans:
- Quick approval = faster income.
- Small ticket size = diversified exposure.
- Better repayment track record (historically).
- High yield: personal loans bring 14–18% interest margins.
However, unlike home or auto loans, these are unsecured loans — with no collateral.
If unemployment or inflation spikes, defaults could rise quickly, catching banks off guard.
📊 Unsecured Loan Growth — The Data Story
| Loan Type | FY22 (₹ Cr) | FY25 (₹ Cr) | Growth % |
|---|---|---|---|
| Home Loans | 18,00,000 | 24,50,000 | 36% |
| Personal Loans | 4,90,000 | 7,20,000 | 47% |
| Credit Cards | 1,40,000 | 2,70,000 | 93% |
| Consumer Durables | 65,000 | 1,10,000 | 69% |
Even as NPAs fall in corporate lending, retail stress indicators are slowly rising.
Default rates on small-ticket loans are up 25% YoY in 2025.
🧭 RBI Steps In: Warning Against Overheating
Sensing the risk, the Reserve Bank of India (RBI) has already raised red flags.
In its October 2024 circular, the RBI:
- Increased risk weights on unsecured loans by 25%.
- Directed banks to enhance provisioning for personal and credit card loans.
- Warned NBFCs and fintechs about “aggressive” lending practices.
Governor Shaktikanta Das noted:
“We are seeing early signs of stress in unsecured retail portfolios. Lenders must act prudently before the situation escalates.”
🏦 NBFCs and Fintechs: The Silent Carriers of Risk
Non-Banking Financial Companies (NBFCs) and digital lenders are heavily exposed to small-ticket personal loans.
Many of them rely on bank funding to operate — meaning the risk eventually loops back to the banking system.
Some fintech lenders have been offering instant personal loans with 30–40% interest, minimal KYC, and high-risk borrowers — creating a shadow debt bubble that could burst if liquidity tightens.
💼 Corporate Credit: Still Cautious
Interestingly, while retail loans are booming, corporate loan growth remains modest.
India Inc. is deleveraging, with many large firms using internal funds instead of borrowing.
This makes the system over-reliant on retail lending — a structural imbalance that could backfire if consumer demand slows.
📉 Deposits Growth Lags Behind Credit
Another subtle but critical risk: deposit growth is lagging behind credit growth.
- Bank deposits grew only 11% YoY in FY25.
- Credit, meanwhile, surged 17%.
This mismatch could pressure liquidity, forcing banks to hike deposit rates — hurting margins.
“The liquidity gap is the silent threat of the next cycle,” warns Saurabh Mukherjea of Marcellus Investment Managers.
📈 Bank Stocks: Still Attractive, But With Caveats
Banking stocks remain a favorite among investors, thanks to clean books and strong earnings.
Top Bank Stocks FY25 YTD Returns:
- SBI – +29%
- ICICI Bank – +23%
- Axis Bank – +18%
- HDFC Bank – +12%
- Bank of Baroda – +37%
However, analysts expect valuation consolidation as concerns around retail credit risks grow.
Private banks with higher unsecured exposure (like HDFC Bank and Axis Bank) are under closer scrutiny.
💬 Expert Voices: The Next Chapter for Banks
“The NPA era is behind us, but retail credit quality will be the next test of resilience.”
— Krishnan Sitaraman, Crisil Ratings.
“Banks must not repeat the same mistake — chasing growth at the cost of prudence.”
— RBI Financial Stability Report, June 2025.
“India’s banking system is robust, but the rapid growth in unsecured credit is unsustainable in the long run.”
— Nomura India Research.
🔚 Conclusion: The Calm After the Storm — or Before the Next One?
India’s banks have done what once seemed impossible — defeating the NPA crisis and restoring credibility.
But history often rhymes.
Today, as the sector celebrates profits and low NPAs, the retail lending boom threatens to sow seeds of the next credit cycle.
If banks manage it prudently, this could simply be a cooling-off phase.
If not, the NPA story may repeat — only this time, with millions of small borrowers instead of big corporates.
💭 As one analyst put it:
“Bad loans don’t start in recessions — they start in the euphoria that comes before them.”
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