Indian banks set for stronger footing: Fitch flags regulatory reforms, reduced risks; growth opportunities remain robust

Indian banks are likely to benefit from enhanced regulatory oversight by the Reserve Bank of India (RBI) and a more robust supervisory toolkit, which should lower systemic risks and improve the sector’s operating environment, global rating agency Fitch said in a report.Fitch noted that these regulatory shifts, combined with strong economic growth prospects and reduced inflation risks, are credit positive for Indian banks. “We believe regulatory responses to stress events, frameworks for monitoring risks and recovery of impaired loans have improved in recent years. Consequently, weaknesses that contributed to the last non-performing loan spike between the financial year ended March 2016 (FY16) and FY18 have been significantly reduced,” the report said, as per news agency PTI.Banking system metrics are now at their strongest in years. The sector’s non-performing loan ratio fell to 2.2 per cent in the first half of FY26, down from a peak of 11.2 per cent in FY18, while the common equity Tier 1 ratio has risen to 14.8 per cent from 9.3 per cent in FY14. Fitch also highlighted that the sector’s return on assets, at around 1.3 per cent, is comparable with peer banking systems in the Asia-Pacific region, reflecting a ‘bbb’ category operating environment.Fitch said the implementation of an expected credit loss (ECL) framework should further reduce volatility by smoothing earnings over the business cycle. Over the medium term, robust economic growth of over 6 per cent over the next two years is expected to provide banks with ample opportunities for profitable lending growth.The report added that India’s banking sector credit-to-GDP ratio stood at 59 per cent in 2025, below the peer average of 101 per cent. “This suggests there is headroom for lending growth to exceed nominal GDP growth moderately over the medium term without posing major risks to systemic stability, if underwriting standards hold up,” it said.Overall, Fitch indicated that stronger supervision, regulatory reforms, and a favourable macroeconomic environment position Indian banks to operate with reduced risks while continuing to expand credit prudently.