The newly appointed governor of the Reserve Bank of India (RBI), Sanjay Malhotra, has said that the prospects of the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25.

He added that consumer and business confidence for 2025 remains high and the investment scenario is brighter as corporations step into the next year with robust balance sheets and high profitability.

Malhotra made these comments in the foreword of the financial stability report (FSR), a bi-annual publication from the central bank, which reflects the collective assessment on the resilience of the Indian financial system.

The report said that asset quality of the Indian banking system improved further during the 2024-25 fiscal and their gross non-performing assets (GNPA) or bad loans ratio declined to a 12-year low of 2.6 per cent in September 2024 on the back of falling slippages and steady credit demand.

In the June report, the RBI had said that the GNPA ratio had declined to 2.8 per cent in March 2024.

However, the central bank flagged concern over a sharp rise in write-offs, especially among private sector banks (PVBs), which it said could be partly masking worsening asset quality in unsecured lending segment and dilution in underwriting standards.

On the personal or retail loans segment, the report said that asset quality remained largely stable, except for a marginal uptick with regard to credit card receivables across bank groups.

This segment recorded the highest credit growth within the personal loans segment and may ``require careful monitoring’’, the FSR noted.

Fresh accretion of NPAs in retail loan portfolios was also dominated by slippages in the unsecured loan book, with 51.9 per cent coming from unsecured loans as of September 2024.

On how large borrowers have fared, the FSR said that share of such borrowers in GNPA of scheduled commercial banks (SCBs) have steadily declined over the past two years. The asset quality of banks’ large borrower portfolios has improved considerably, with the GNPA ratio falling from 4.5 per cent in March 2023 to 2.4 per cent in September 2024.

“Within the large borrowers’ cohort, the share of top 100 borrowers has decreased to 34.6 per cent in September 2024, reflecting a growing credit appetite among medium-sized borrowers.” None of the top 100 borrowers are classified as NPAs in September 2024.

Stress tests conducted by the regulator showed that the aggregate CRAR (capital to risk weighted adequacy ratio or the capital that banks have to maintain relative to their loans) of 46 major SCBs may fall from 16.6 per cent in September 2024 to 16.5 per cent by March 2026 under the baseline scenario and to 15.7 per cent under adverse scenario.