The Indian banking sector demonstrated robust financial performance in FY25, marked by stronger profitability and significantly improved asset quality, according to the Reserve Bank of India's Report on Trend and Progress of Banking in India. Despite some moderation in margins and an increase in fraud-related amounts, the overall sector health showed marked improvement across key performance indicators.

Asset Quality Reaches Historic Highs

The banking sector achieved a significant milestone in asset quality management during FY25. The following table highlights the key improvements:

The Gross Non-Performing Assets ratio declining to 2.20% represents the lowest level achieved by the banking sector in multiple decades, indicating substantial progress in resolving legacy asset quality issues and improved lending practices.

Accelerated Stressed Asset Resolution

Banks significantly stepped up their efforts to clean balance sheets through increased sales to Asset Reconstruction Companies. The sector sold loans worth ₹16.19 lakh crore at book value to ARCs in FY25, compared to ₹10.25 lakh crore in the previous year. Private and foreign banks accounted for a significantly higher share of these ARC sales, demonstrating their proactive approach to asset quality management.

Non-Banking Financial Companies Performance

The NBFC sector maintained its growth trajectory during FY25, though with some moderation in profitability metrics:

Despite the marginal decline in net profit, NBFCs continued to demonstrate resilience with sustained asset and income growth, reflecting their important role in the broader financial ecosystem.

Housing Finance Companies Show Steady Progress

Housing Finance Companies reported encouraging performance indicators during FY25. The sector achieved steady improvement in profitability metrics while maintaining operational stability:

• Net Profit: ₹19,367.00 crore, representing an increase from previous levels
• Asset Growth: Remained largely stable throughout the period
• Profitability Trend: Consistent improvement across the sector

The HFC sector's performance reflects the continued demand for housing finance and effective business management practices adopted by these institutions.

Sector Outlook and Key Developments

The banking sector's performance in FY25 demonstrates significant progress in addressing structural challenges while maintaining growth momentum. The achievement of multi-decadal low GNPA ratios, combined with increased stressed asset resolution activities, indicates improved risk management practices and regulatory effectiveness. However, the sector continues to navigate challenges including margin pressures and rising fraud-related incidents, requiring continued vigilance and strategic management focus.

Non-banking financial companies (NBFCs) demonstrated robust growth in FY25 with balance sheets expanding significantly, even as the microfinance segment faced mounting stress, according to the Reserve Bank of India's latest Trend and Progress of Banking in India report.

Strong Balance Sheet Growth and Profitability

The NBFC sector recorded substantial expansion during FY25, driven primarily by strong growth in loans and advances:

Upper layer NBFCs reported ₹27,019 crore in profits during the first six months ended September 2025, reflecting continued strong performance in the current fiscal year.

Asset Quality Shows Mixed Trends

Overall asset quality of the NBFC sector improved during FY25, with broad-based improvements across most categories:

The RBI noted that the share of standard assets in aggregate credit extended by NBFCs rose, alongside a decline in sub-standard and doubtful assets, reflecting effective resolution of bad loans and adequate provisioning.

Microfinance Segment Faces Challenges

While the broader NBFC sector showed improvement, the microfinance segment remained an outlier with sharp deterioration in asset quality. NBFC-MFIs experienced significant stress, with the GNPA ratio more than doubling from 2.0% to 4.1% during FY25. The RBI attributed this deterioration to underlying stress in the segment and recovery challenges faced by microfinance institutions.

Current Regulatory Framework Structure

The scale-based regulation framework continues to categorize NBFCs into three distinct layers:

As of end-September 2025, GNPA and NNPA ratios of the overall NBFC sector remained unchanged from end-March levels, indicating stabilization in asset quality trends. However, within larger NBFCs, asset quality trends showed mixed results, with upper-layer NBFCs maintaining unchanged GNPA ratios while NNPA worsened due to declining provisions.