A decade ago, India's banking sector was in crisis. Gross non-performing assets had ballooned to 11.46% of total advances by March 2018 — one of the highest NPA ratios among major emerging economies — as a decade of reckless infrastructure and corporate lending came due simultaneously. Public sector banks were technically insolvent in all but name, dependent on successive rounds of government recapitalisation to stay afloat. The very credibility of India's financial system was in question.

That India feels like a different country. By March 2025, gross NPAs had fallen to 2.31% — a 20-year low. Net NPAs, reflecting actual loss exposure after provisions, stood at 0.52%. Return on equity across scheduled commercial banks reached 14.09%, up from a deeply negative -2.74% in FY2018. Public sector bank profits surged 26% to ₹1.83 lakh crore in FY25. Total bank credit has tripled over a decade, from ₹66.91 lakh crore in 2015 to ₹181.34 lakh crore in 2025. Capital adequacy ratios are robust at 17.36% — well above the Basel III minimum.

The turnaround is real. The question for 2026 and beyond is whether a banking sector that has successfully navigated a decade of cleanup is now structured, scaled, and sophisticated enough to finance a $10 trillion economy.

The Reforms That Made the Turnaround

The recovery was not accidental. It was the product of a deliberate, multi-year strategy built on four pillars — Recognise, Resolution, Recapitalisation, and Reforms — that forced India's banks to confront the true state of their balance sheets and then systematically clean them up.

The Asset Quality Review of 2015, initiated by the RBI under Governor Raghuram Rajan, compelled banks to recognise hidden NPAs that had been evergreened for years. It was painful — NPA ratios spiked sharply in the short term as the scale of the problem became visible — but it was necessary. You cannot fix what you refuse to acknowledge.

The Insolvency and Bankruptcy Code of 2016 transformed India's creditor rights framework. Before the IBC, recovering bad loans through courts could take decades. The IBC created time-bound resolution processes and, critically, deterred wilful defaults by making the consequence — loss of ownership — real and fast. The IBC has processed tens of thousands of default cases and is now a foundational pillar of India's credit culture.

Government recapitalisation — ₹3.10 lakh crore injected into public sector banks between FY16 and FY22 — gave the cleaned-up balance sheets the capital buffer needed to resume lending without fear. And PSB consolidation — reducing 27 public sector banks to 12 through mergers — created scale, reduced operational fragmentation, and forced governance improvements that smaller, weaker institutions had been unable to implement independently.

The result is a sector that, by standard metrics, is in its best shape in two decades. The RBI's proposed Expected Credit Loss framework — moving from a backward-looking to a forward-looking provisioning model — will, when implemented, bring India's accounting standards for bank risk fully in line with global best practice.

The Nuance Behind the Headlines

But India's banking story in 2026 requires nuance. The headline NPA number — 2.31% — is genuinely impressive. What lies beneath it, however, deserves careful scrutiny.

A significant part of the NPA reduction has been achieved through write-offs rather than recoveries. In FY2024–25, Indian banks wrote off approximately ₹1.58 lakh crore in bad loans — against actual recoveries of just ₹0.68 lakh crore. Write-offs are a legitimate and necessary tool. But a low NPA ratio achieved partly through aggressive write-offs is not the same as a low NPA ratio achieved through improved repayment behaviour. The distinction matters for assessing the true health of the credit culture, not just the balance sheet.

There are also pockets of emerging stress that the aggregate numbers obscure. Unsecured retail lending — personal loans and credit cards — has grown at double-digit rates for three consecutive years, and the RBI has explicitly flagged "exuberance" in this segment. Default rates on unsecured loans are rising from a low base. Co-lending arrangements between banks and NBFCs — a rapidly growing segment — show higher NPA rates at public sector banks than at private ones, suggesting that the race for volume has not always been matched by adequate credit discipline. Priority sector lending — to agriculture and MSMEs — continues to show structurally higher NPA levels than commercial lending.

The interconnection between banks and NBFCs has also deepened significantly. Banks lend to NBFCs, buy NBFC loan pools, and co-originate loans with NBFC partners. This creates efficiency and reach — but also concentration risk. If stress in the NBFC sector materialises at scale, the transmission to bank balance sheets will be faster and deeper than in previous cycles. The RBI is watching this carefully, and its regulatory messaging has been appropriately cautious.

The Scale Challenge — What a $10 Trillion Economy Actually Demands

Beyond asset quality, the more fundamental question is whether India's banking sector can generate the credit volumes a $10 trillion economy will require.

The arithmetic is demanding. India's total bank credit stands at approximately ₹181 lakh crore — roughly $2.1 trillion. A $10 trillion economy, even with conservative assumptions about the credit-to-GDP ratio, would require credit outstanding of $6–7 trillion. That is a three-to-four-fold increase from today's levels — requiring sustained credit growth of 12–15% annually for a decade. Credit growth is currently projected at 11–13% for FY2026–27. The direction is right, but sustaining that pace over a decade, while maintaining asset quality and managing capital requirements, is a genuinely significant challenge.

The deposit mobilisation gap is an immediate constraint. India's loan-to-deposit ratio has been rising as credit growth outpaces deposit growth — a structural mismatch that the RBI has flagged repeatedly. Banks are competing aggressively for deposits, driving up the cost of funds. Financial savings are increasingly flowing into mutual funds, equities, and insurance products rather than bank deposits. Building a deeper, more stable deposit base — particularly from India's vast semi-urban and rural population — is essential to sustaining the credit expansion India needs.

GIFT City is an important piece of the puzzle. As India's international financial services centre matures, it is giving Indian banks access to global capital markets at competitive rates, enabling the kind of large-ticket infrastructure and corporate financing that domestic deposit bases alone cannot fund. The expansion of Indian banks' global presence through GIFT City is a strategic priority that the government has rightly emphasised.

Ready — With Work Still to Do

India's banking sector in 2026 is, by any honest assessment, in significantly better shape than it has been in a generation. The NPA cleanup is real. The capital buffers are genuine. The profitability is structural, not cyclical. The regulatory framework — IBC, SARFAESI, ECL provisioning — is the strongest India has ever had. The public sector bank transformation, while incomplete, is measurable and continuing.

But "better than before" is not the same as "ready for $10 trillion." The deposit gap must be addressed. The unsecured lending exuberance must be managed before it creates the next stress cycle. The NBFC-bank interconnection risk must be monitored with genuine rigour. And the scale of credit expansion India needs — sustained, quality, broadly distributed across MSMEs, infrastructure, and manufacturing — demands continued institutional improvement at a pace that matches the ambition.

India's banks are no longer the weak link in India's growth story. That is a genuine achievement, built over a decade of difficult reform. The task now is to ensure they become the strong link — the financial engine powerful enough to carry India from $4 trillion to $10 trillion. The foundation is there. The building still has floors to add.

The Hind covers policy, power, and strategic affairs from India's perspective. Views expressed are analytical and editorial.