The 2025 Financial Stability Report sets out a clear picture of how India’s financial system is positioned to navigate an unsettled environment. While the global backdrop remains unsettled, the report turns its focus to India’s financial system—highlighting both strengths and vulnerabilities. It presents a comprehensive view of sectoral soundness while outlining new regulatory measures designed to strengthen transparency, enhance risk management, and safeguard systemic stability.
Global Backdrop
The June 2025 FSR opens against a global environment marked by elevated uncertainty and heightened financial risks. Recent shifts in trade policies have amplified turbulence in international markets. These disruptions, combined with ongoing geopolitical tensions, have unsettled capital flows, triggered volatility in equities and bond markets, and tested the resilience of financial systems across regions.
Global growth forecasts have been revised downward by major multilateral agencies, with the IMF projecting world GDP growth to moderate to 2.8% in 2025. Another concern is the rapid accumulation of public debt worldwide, which is expected to exceed 95% of GDP in 2025 and move closer to 100% by the end of the decade.
Equity valuations in major technology firms remain stretched, while sovereign bond markets are showing signs of liquidity stress. At the same time, climate-related financial risks and the rising threat of cyberattacks add further complexity for regulators across economies.
The FSR cautions that the interaction of these risks—shifting trade policies, high debt levels, and volatile capital flows—could magnify shocks.
India’s Domestic Strength
Against this volatile global backdrop, India stands out as a driver of growth and stability. The FSR highlights that India remains the fastest growing major economy, with GDP growth projected at 6.5% in 2025–26. India’s growth is underpinned by resilient domestic demand—both rural and urban—backed by government capital expenditure, strong services sector activity, and improving private investment momentum.
Inflation dynamics have also turned favourable. Headline CPI inflation fell to 2.8% in May 2025, the lowest in six years, aided by softening food prices and stable commodity trends. The Reserve Bank projects inflation to align durably with its 4% target.
India’s external sector continues to be a source of strength. The current account deficit narrowed to 0.6% of GDP in 2024–25. Foreign exchange reserves climbed to US$697.9 billion as of June 2025, offering import cover of more than 11 months and cushioning the economy against external volatility. External debt, at 19.1% of GDP, remains moderate by emerging market standards.
The resilience extends into the financial sector. Scheduled commercial banks have built strong capital buffers, reduced non-performing assets to multi-decade lows, and maintained profitability. Stress tests conducted by the RBI confirm that even under severe scenarios, banks and non-bank lenders would remain well above regulatory capital thresholds. Insurance companies, mutual funds, and clearing corporations also exhibit robust solvency and liquidity positions.
That said, the FSR does acknowledge risks. Escalating geopolitical conflicts, global trade slowdowns, capital outflows, and weather-related shocks could create spillovers that challenge India’s outlook. Nevertheless, the overall picture is one of resilience, underpinned by strong domestic fundamentals and prudent policymaking.
Financial Sector & RBI’s Regulatory Initiatives
The June 2025 FSR provides a detailed review of India’s financial sector, underscoring both its resilience and the areas requiring vigilance. Scheduled Commercial Banks (SCBs) remain at the core of this resilience, underpinned by solid capitalization and improving asset quality. As of March 2025, SCBs boast a Capital to Risk-weighted Assets Ratio (CRAR) of 17.3%. This is complemented by Gross Non-Performing Asset (NPA) ratios at multi-decade lows of 2.3%, and net NPA ratios reduced considerably to just 0.5%.
Further strengthening the resilience profile is the rise in the Common Equity Tier 1 (CET1) ratio to 14.7%, a key metric reflecting the core equity capital available to absorb losses without jeopardizing solvency. Stress testing conducted by the RBI reinforces this strength, as simulations modelling severe economic shocks project that aggregate capital ratios of the banking sector would stay comfortably above 14%. This resilience demonstrates the sector’s ability to withstand adverse developments, including global economic shocks or domestic turbulence.
Non-Banking Financial Companies (NBFCs) also present a positive picture, reporting strong capital adequacy with a CRAR of 25.8% as of March 2025. NBFCs’ asset quality remains contained, with gross NPA levels at 3%, equipping them to contribute effectively to credit growth without becoming a source of systemic risk.
Urban Cooperative Banks (UCBs) have also strengthened their resilience, with CRAR improving to 18.0%. This progress enhances their ability to serve local communities while contributing to overall financial stability in the cooperative banking sector.
The report notes a significant shift in resource mobilization towards debt instruments, with debt comprising 63.5% of total resource mobilization and an overwhelming 99.2% of this via private placements. This trend underscores growing reliance on private debt markets rather than public issuances, highlighting the need for close monitoring of transparency, credit risk, and market liquidity to protect against potential vulnerabilities.
However, despite this overall strength, the FSR identifies “pockets of stress,” notably in microfinance and unsecured retail loans. Microfinance stands out as a segment requiring particular vigilance: Non-Performing Loans (NPLs) for microfinance in the 31–180 days past-due category is notably high at 6.2%, indicating a rising segment strain. The report further details that stricter lending norms in FY 2024–25 led to 4 million fewer borrowers in microfinance amidst a rise in delinquencies. Unsecured retail loans now constitute one-fourth of the banking portfolio and are rising, leading banks—particularly private ones—to increase caution due to upticks in delinquencies. While the overall GNPA for SCB unsecured retail loans is still low at 1.8%, it is higher for Private Sector Banks (PVBs).
Amid this backdrop, the centrepiece of the June 2025 FSR is the Reserve Bank of India’s proactive regulatory agenda. These initiatives are designed not just as safeguards but as enablers of transparency, innovation, and resilience in the financial ecosystem. Among the major initiatives:
RBI’s Key Regulatory Initiatives
- Digital Lending Directions, 2025
The directions establish a comprehensive framework for digital lending platforms. They mandate clear borrower verification procedures, compulsory disclosure of all charges, and standardized grievance redressal mechanisms. These rules address risks of opaque practices, over-leveraging, and hidden fees. By formalising processes and responsibilities, the framework ensures that credit delivered through digital platforms remains transparent and compliant with prudential norms, while reducing systemic risks from rapid growth in this channel. - Project Finance Directions, 2025
Project finance accounts for a significant share of long-term credit exposure in India, particularly in infrastructure. Past cycles showed risks of cost overruns, repayment delays, and concentrated exposures. The new directions introduce uniform standards for project appraisal, monitoring, and reporting across banks and financial institutions. The framework requires more rigorous risk assessment, standardised documentation, and closer alignment between lenders and project developers. The aim is to strengthen asset quality in long-horizon lending and reduce accumulation of stressed assets in large projects. - Liquidity Coverage Ratio (LCR) Amendments
The LCR framework, which requires banks and NBFCs to hold a buffer of high-quality liquid assets, has been revised to further strengthen short-term resilience. The amendments specify higher granularity in asset classification, closer monitoring of intraday liquidity, and revised thresholds to ensure adequacy under stress scenarios. These steps enhance the ability of institutions to continue meeting obligations during periods of funding strain, ensuring continuity of credit flows and market stabilit. - Use of Indian Rupee for Cross-Border Settlements
To reduce reliance on foreign currency settlement systems, the RBI has expanded the framework for settling international trade transactions in rupees. The mechanism allows invoicing, payment, and settlement of imports and exports in INR, supported by authorised dealer banks. It enables smoother cross-border transactions for businesses and financial institutions operating with Indian counterparties. - Prevention of Financial and Digital Payments Fraud
Rapid expansion of digital payments has heightened risks of fraud and misuse. The RBI has strengthened its framework with mandatory adoption of advanced fraud detection tools, stricter transaction monitoring protocols, and enhanced accountability of payment intermediaries. Reporting requirements have been tightened to improve early detection and response to fraudulent activity. These measures aim to safeguard consumer transactions, ensure integrity of payment systems, and limit systemic risks arising from fraud in high-volume digital platforms. - Safer Retail Participation in Algorithmic Trading
Algorithmic trading systems allow automated execution of strategies but can expose retail investors to disproportionate risks. The RBI framework introduces specific safeguards: restrictions on high-risk strategies, mandatory pre-trade and post-trade risk controls, and monitoring of retail algo participation through brokers and exchanges. The framework is designed to ensure that while algorithmic systems expand participation in markets, retail investors are insulated from unintended losses or destabilising strategies. - Identification of Unclaimed Assets
Significant pools of unclaimed deposits, dormant accounts, and unclaimed investments exist within the financial system. The RBI has outlined mechanisms to systematically trace, identify, and manage these funds. Institutions are required to strengthen disclosure, reporting, and reconciliation processes. A centralised repository framework is also being developed to improve transparency, allowing rightful claimants to access information and recover their assets. This measure addresses inefficiencies in fund management and strengthens accountability across institutions. - Mutual Funds Lite (MF Lite) Framework and Specialised Investment Funds
To deepen capital markets while safeguarding systemic stability, the RBI has introduced two new frameworks. The MF Lite framework simplifies entry, compliance, and operations for smaller investors, ensuring easier access to mutual fund products without diluting regulatory protections. Specialised Investment Funds, on the other hand, expand regulated avenues for channeling capital into specific sectors of the economy. Together, these measures broaden investor participation, diversify capital flows, and strengthen the structure of India’s investment ecosystem. - Operational & Cyber Resilience Measures
Recognising the centrality of technology in modern finance, the RBI has issued new requirements to enhance operational and cyber resilience of intermediaries. These include compulsory technology-based system audits, enhanced disclosure norms for incidents, stricter monitoring of outsourcing arrangements, and closer supervision of brokers, NBFCs, and payment intermediaries. The measures are aimed at ensuring continuity of critical financial services, minimising disruption from cyber incidents, and protecting the overall stability of the financial infrastructure.
These measures are supplemented by other regulatory developments, such as forward contracts in government securities, intraday monitoring of derivatives position limits and technology-based audits of stock brokers.
The June 2025 FSR shows that India’s financial system is robust yet alert to global risks. With initiatives like digital lending reforms, rupee-based settlements, safeguards for retail investors, and stronger cyber resilience, the RBI is building both stability and adaptability into the system. These steps reinforce confidence that India’s financial sector can withstand shocks while continuing to innovate and expand opportunities for growth.
Link to the RBI FSR report (June 30, 2025) : https://indiafintechfoundation.com/regulatoryAnnouncements
Contributed by Adhwaith Ashok, India Fintech Foundation
