Why India’s Healthiest Banks in Decades Matter to Every Indian
India’s banking clean-up has pushed NPAs to multi-decade lows. The implications go well beyond finance — affecting jobs, credit, investment, and public spending.
The sharp fall in non-performing assets visible in the latest banking data may appear, at first glance, to be an issue relevant only to bankers and regulators. It is not. With Gross NPAs at about 2.2% and Net NPAs at roughly 0.5%, India’s banking system is in its strongest position in decades and this has direct implications for economic growth, job creation, household credit, and the country’s investment outlook.
For ordinary citizens, banks are not abstract institutions. They finance homes, businesses, education, infrastructure, and government spending. When banks are weak, the entire economy pays the price through stalled projects, tighter credit, higher interest rates, and slower growth. India experienced this first-hand in the years following the NPA crisis that peaked around 2018.
That crisis was the result of a prolonged period of aggressive lending, particularly to capital-intensive sectors such as infrastructure, power, steel, and telecom. Credit decisions were often based on optimistic growth assumptions rather than realistic cash-flow assessments. Stress was repeatedly postponed through restructuring and rollovers. When recognition finally came, it was abrupt and painful but unavoidable.
What followed was one of the most consequential clean-ups in India’s financial history. The steady decline in NPAs since 2019 signals that the correction was not cosmetic. Banks improved risk assessment, increased provisioning, accepted losses, and used resolution frameworks more decisively. Equally important, regulatory oversight became stricter and more consistent. The result is visible today in healthier balance sheets and stronger capital buffers.
For the Indian economy, this shift is significant for three reasons.
First, healthier banks are better lenders. When NPAs are low and capital is adequate, banks can lend with confidence rather than fear. This supports credit flow to small businesses, entrepreneurs, and productive sectors. All are areas that generate employment and sustained growth. It also allows monetary policy changes to transmit more effectively, benefiting borrowers across the economy.
Second, banking stability strengthens investor confidence. Domestic and global investors closely track the health of the financial system. A banking sector no longer weighed down by legacy stress improves India’s attractiveness as an investment destination, particularly at a time when the country is positioning itself as a manufacturing and infrastructure hub.
Third, fiscal space improves. Weak banks often require repeated capital infusions, straining public finances. As bank balance sheets strengthen, the burden on taxpayers reduces, freeing resources for social and developmental spending.
However, this is not a moment for complacency. The real test of India’s banking system will come not during periods of strong growth, but when economic conditions turn less favourable. Maintaining discipline in good times is far harder than enforcing it during crises.
Globally, India’s banking recovery stands out. While banks in the United States and Europe continue to face pressure from high interest rates, unrealised bond losses, and selective failures, Indian banks have emerged from their clean-up with stronger balance sheets and lower stress, offering relative stability in a volatile global financial environment.
Ultimately, the significance of today’s low NPAs lies not in the numbers themselves, but in what they represent, which is a hard-earned institutional memory. If banks, regulators, and policymakers can preserve this discipline, India’s financial system can remain a source of strength rather than vulnerability. If not, the cycle risks repeating itself.
For the Indian economy, this moment is both an achievement and a responsibility.
(CA Abhinav Agarwal is a qualified Chartered Accountant and co-founder of INDIFINVEST.COM, the brand identity of AAAIP Finvest Services, one of the leading financial services firms.)