Tighter RBI Risk Framework to Boost Indian Banks’ Operating Environment: Fitch

Fitch Ratings believes Indian banks are positioned to benefit from enhanced oversight by the Reserve Bank of India and a more robust supervisory toolkit. According to the rating agency, these regulatory measures are expected to reduce systemic risks and foster a superior operating environment for the sector. The agency noted that these structural shifts, when combined with strong economic growth prospects and diminishing inflation risks, constitute a credit positive development for Indian lenders.

Fitch stated that regulatory responses to stress events, frameworks for risk monitoring, and impaired loan recovery have witnessed substantial improvement in recent years. As a result, the structural weaknesses that contributed to the spike in non-performing loans between the financial year ended March 2016 and 2017-18 have been significantly reduced, according to the report.

The agency said key regulatory interventions since 2019 -- the withdrawal of regulatory asset quality forbearance, the implementation of large-exposure frameworks, and the introduction of capital requirements surpassing Basel III standards-- would enable banks to provision more effectively across the risk cycle, thereby smoothing earnings volatility.

Fitch specifically pointed to the central bank’s recent announcement regarding the adoption of a forward-looking expected credit loss framework, aligned with IFRS 9 standards, effective April 1, 2027. 

Fitch observed that banks are better equipped to monitor and control loan risks. The Central Repository of Information on Large Credits (CRILC), established in 2014, was cited as an effective tool for containing risks linked to large corporate exposures. Additionally, improved access to retail credit bureau data and reporting standards has reduced the likelihood of significant retail stress accumulation.

The implementation of the Insolvency and Bankruptcy Code in 2016 was identified as a critical factor in cleaning up bank balance sheets. According to Fitch, the regime has resolved ₹12 trillion in problem loans since its inception. Concurrently, the risk profile of Indian corporate borrowers has improved through deleveraging. Citing RBI data, Fitch noted that the median debt-to-equity ratio for corporates fell to 43% in 2024-25, down from 73% in 2016-17.

Banking system metrics were described as the strongest in years, although the agency cautioned that some recent reforms remain untested through a down-cycle. Fitch reported that the sector’s non-performing loan ratio declined to 2.2% in the first half of 2025-26, a significant drop from the peak of 11.2% in 2017-18. The common equity Tier 1 (CET1) ratio increased to 14.8%, compared to a Fitch estimate of 9.3% in 2013-14. The sector’s return on assets (ROA) is hovering around 1.3%, which Fitch noted is comparable to peer banking systems in the Asia-Pacific region holding ‘bbb’ category operating environments.

Over the medium term, Fitch projects India’s economic growth to remain above 6% over the next two years, providing ample headroom for profitable lending. The agency estimates the banking sector’s credit-to-GDP ratio at 59% in 2025, well below the peer average of 101%. This suggests capacity for lending growth to moderately exceed nominal GDP growth without threatening systemic stability, provided underwriting standards are maintained.

Macroeconomic stability also remains a supporting factor. Fitch expects consumer price inflation to average between 4% and 4.5% in the coming years, moderating from approximately 5% recorded between 2015 and 2024. The agency also noted that India’s low dependence on exports mitigates risks associated with US tariffs, while substantial foreign-exchange reserves buffer the economy against external shocks.

The report also said that an upward revision of India’s bank operating environment category would present upward potential for the standalone Viability Rating key rating driver scores of Indian banks. Fitch indicated this could lead to upgrades in VRs and Issuer Default Ratings for private banks, as their VRs are currently situated close to, or at, their Government Support Rating levels. While state-owned banks could also see VR upgrades, their IDRs are expected to remain anchored to their Government Support Rating.