Risk Sensitive Banking: Strength, Scale and Stability Beyond 2026

Amid ongoing reforms, banks are on a firm footing, capable of increasing their risk appetite to expand operations and support a growing economy. Key performance indicators for September 2025 affirm it. The capital adequacy ratio stands at 17.24%; gross non-performing assets are at a historic low of 2.2%, with net NPAs down to 0.48%. 

The liquidity buffer remains robust, with a liquidity coverage ratio of 131.69%, well above the 100% minimum required to cover gaps over the next 30 days. The annualised return on assets is 1.32%, and the return on equity stands at 13.06%. Net interest margin is 3.26%.

The next challenge is to sustain this strength and build on it. In a bank-dependent economy, offering sufficient credit to productive sectors is crucial to unlock full growth potential. Demographic shifts, changing savings and investment habits among tech-savvy customers, and the rise of alternative investment options are making it harder for banks to mobilise lendable resources. 

Deposit growth has lagged behind credit growth over the past three years, exerting pressure on banks' durable liquidity. During 2022-23 and much of 2023-24, credit growth was 15% year-on-year, while deposit growth was around 9-10%.

During 2024-25 and into the next year, credit growth slowed to 11.4%, while deposit growth remained near 10.2% YoY. The credit-deposit ratio, which was 75% in 2023, rose to 79% in 2024 and exceeded 80% during 2025-26. Beyond this, banks will need to rely on market borrowing to manage liquidity risk.

Empowering Banks
In addition to lowering the repo rate by 125 basis points to stimulate growth, the cash reserve ratio was reduced from 4% to 3%, adding durable liquidity. Consequently, more lendable resources should accrue through future deposit growth.  In the recent monetary policy, the RBI injected ₹1.4 trillion to ₹1.6 trillion of durable liquidity through open market operations and USD/INR buy-sell swaps for three years. RBI further assured that it would provide temporary liquidity via its LAF window, using variable rate repos (liquidity infusion) and VRRR (liquidity absorption), to ensure that the weighted average call rate remains within the SDF rate of 5% and MSF of 5.5%.

Over the past year, the RBI has eased several constraints to give banks greater flexibility, particularly to large corporates and capital–market–linked activities, while maintaining core prudential safeguards. In September–October 2025, the RBI withdrew the system-wide cap, allowing banks to lend more to large corporates; only the large exposure framework at the individual bank level now applies (20% of Tier 1 per borrower, 25% per group).

The scope of lending against listed equity and debt was widened, with caps on loans against shares raised from ₹2 million to about ₹10 million per borrower, and limits on IPO financing eased from ₹1 million to ₹2.5 million.

Lending against gold and silver has also been expanded, allowing working capital loans to manufacturers using bullion, longer tenors under draft rules, and wider participation by cooperative banks. Margins and loan-to-value ratios have been rationalised.

Risk Guardrails
Revised Liquidity Coverage Ratio norms will take effect on April 1, 2026, mandating an additional 2.5% run-off provision for internet- and mobile-linked retail deposits and for small businesses sensitive to digital operations. Haircuts on G‑secs treated as Level‑1 high quality liquidity assets are now aligned with LAF/MSF margins.

From April, all regulated lenders must report borrower data to credit information companies weekly instead of fortnightly, and submit complete monthly data by the third working day. This will demand tighter data controls, faster core banking integration, and stronger governance.

Capital rules have been amended to allow accrued profits in regulatory capital and to tweak exposure caps, effective April 1, 2026, with early adoption permitted.​

At the same time, banks will have to begin implementing Basel–III capital norms and the expected credit loss provisioning framework, effective April 1, 2027, with a glide path to March 2031. They will need to run parallel models in advance, testing data integrity and refining probability of default, loss given default and exposure at default frameworks to sharpen projections.

Banks must also implement ring-fencing of business risks, segregating high-risk and/or non-core activities, including in subsidiaries operations, and submit plans to the central bank by March 2026. Activities such as real estate, trading, manufacturing, speculative investments and complex investment products will face tighter limits or be shifted to separately capitalised group entities. Structural implementation must be completed by March 31, 2028.

This will embed risk sensitivity into business models and operating structures. To add flexibility, the regulator has introduced a “transaction account” framework effective from April 1, 2026, easing rules for current, overdraft, and cash credit accounts. Banks may now freely offer such accounts to borrowers with aggregate exposure below ₹100 million.​

For exposures of ₹100 million or more, any bank with at least 10% of its total banking system exposure may maintain current/OD accounts. The earlier idea of limiting large borrowers to transaction accounts with only two banks has been dropped; with eligibility now driven by the 10% exposure rule.

Task Ahead
Banks face a twin reality: opportunities to scale up, and the challenge of building a stronger risk ecosystem to match that growth. While offering operational freedom, the RBI has raised the bar on risk discipline to safeguard sustainability. To leverage operational flexibility, banks will need to undertake capacity-building and enhance risk sensitivity.

In a declining interest-rate regime, demand for credit will increase, calling for greater risk appetite and more efficient deployment of lendable resources.