Credit growth in the Indian banking sector showed a notable moderation in FY25, with year-on-year growth slowing to approximately 10.2%-11% compared to over 20% in FY24. This deceleration reflects a combination of conservative lending practices, sectoral shifts, and macroeconomic factors such as inflationary pressures and global uncertainties. RBI data for August 2025 indicates that credit growth to industry slowed to 6.5%, down from 9.7% the previous year, signaling a broad-based cooling across key sectors including agriculture, personal loans, and services. However, MSMEs and select industries have maintained relatively robust credit demand, indicating a mixed sectoral pattern. The RBI’s monetary policy easing — including two 25-basis-point repo rate cuts and a 50-basis-point reduction in the cash reserve ratio (CRR) — along with liquidity injections totaling ₹6.9 trillion, aim to stimulate credit off-take in FY26. Despite these measures, challenges persist in deposit mobilization and the cost of funds, which remain elevated due to competitive pricing and customer preference for high-yield term deposits. The outlook for FY26 is cautiously optimistic, with expectations of credit growth rebounding to 10.4%-11.3%, supported by GST rate cuts and a revival in private investment cycles. However, the credit growth recovery is expected to be uneven, with private sector banks outperforming public sector banks in profit growth and lending momentum.

Non-performing assets (NPAs) continue to be a critical concern for Indian banks, impacting profitability, capital adequacy, and credit growth capacity. Although gross NPAs have declined from peak levels in recent years due to aggressive resolution mechanisms, including Insolvency and Bankruptcy Code (IBC) proceedings, the risk of asset quality deterioration remains, especially in retail unsecured loans and stressed corporate sectors. The RBI’s regulatory framework emphasizes early identification, stringent provisioning norms, and resolution timelines to contain NPA risks.

Banks are increasingly adopting innovative strategies to manage NPAs, including technology-driven credit monitoring, securitization, and asset reconstruction. Digital tools enable real-time risk assessment and early warning signals, improving the quality of credit portfolios. Moreover, banks are focusing on restructuring viable stressed assets to avoid outright defaults.

The following table compares key NPA management metrics across selected banks as of Q2 FY26:

The higher provision coverage ratio (PCR) and lower NPA ratios of private banks reflect stronger asset quality management. PSBs, while improving, still carry legacy stress. Investors should evaluate banks’ NPA trends in conjunction with credit growth and provisioning policies to assess risk-reward balance.

Given the evolving banking sector landscape in 2025, retail investors and financial professionals should adopt nuanced strategies that balance growth prospects with risk management. Key actionable insights include:

- Focus on Private Sector Banks: With higher credit growth potential and superior asset quality metrics, banks like HDFC Bank, ICICI Bank, and Kotak Mahindra Bank present attractive investment opportunities.

- Monitor Asset Quality Trends: Regularly review banks’ NPA ratios, provision coverage, and restructuring exposures to avoid surprises.

- Leverage Sectoral Diversification: Banks with diversified credit portfolios across MSMEs, industry, and retail segments are better positioned to withstand sector-specific downturns.

- Consider Valuation Metrics: While private banks trade at premium valuations, PSBs may offer value plays if asset quality improves and credit growth stabilizes.

- Stay Updated on Regulatory Changes: RBI’s monetary policy and regulatory interventions can impact bank margins and credit cycles.

The table below presents a risk-return analysis of select banks based on recent financial metrics:

Investors should weigh growth prospects against asset quality risks and valuation premiums. Diversification across private and improving public sector banks can mitigate sectoral risks. Furthermore, incorporating digital banking trends and regulatory developments will enhance portfolio resilience.