Fitch noted that enhanced monitoring mechanisms, quicker regulatory responses to stress events, and improved frameworks for resolving stressed assets have significantly strengthened the banking system. 

Indian banks are poised to benefit from stronger regulatory oversight and a more robust supervisory framework by the Reserve Bank of India (RBI), which is expected to lower systemic risks and improve the overall operating environment, global rating agency Fitch Ratings said on Tuesday.

In a report, Fitch noted that enhanced monitoring mechanisms, quicker regulatory responses to stress events, and improved frameworks for resolving stressed assets have significantly strengthened the banking system. These changes, combined with India’s strong economic growth outlook and easing inflation risks, are credit positive for the sector.

Fitch said vulnerabilities that led to the sharp rise in non-performing loans (NPLs) between FY16 and FY18 have been substantially addressed. As a result, banking system metrics are now the strongest seen in several years, although some newer reforms are yet to be tested in a full economic downturn.

The sector’s gross NPL ratio declined sharply to 2.2 per cent in the first half of FY26, compared with a peak of 11.2 per cent in FY18. Capitalisation has also improved, with the common equity Tier 1 (CET1) ratio rising to 14.8 per cent from about 9.3 per cent in FY14.

Profitability indicators have strengthened as well. Fitch said return on assets for Indian banks, at around 1.3 per cent in recent years, is comparable with peer banking systems in the Asia-Pacific region operating in a ‘bbb’ category environment.

The agency added that the implementation of an expected credit loss (ECL) framework should help reduce earnings volatility by smoothing performance across cycles.

Looking ahead, Fitch expects India’s economic growth—projected at above 6 per cent over the next two years—to support healthy and profitable credit expansion. It estimated the banking sector’s credit-to-GDP ratio at 59 per cent in 2025, well below the peer average of 101 per cent, indicating room for lending growth without major risks to financial stability, provided underwriting standards remain prudent.