External shock risks rise as geopolitics, AI reshape global economy; near-term outlook uncertain: RBI governor

Asset quality of banks improves to 1.8% in FY26, may decline to 4.1% in adverse scenario in FY28, says RBI’s FSR

Growing geopolitical fragmentation and technological disruption brought about by rapid advances in artificial intelligence (AI) are the two forces reshaping the global economy and the financial system, said the Reserve Bank of India (RBI) Governor Sanjay Malhotra on Tuesday.

The risk of adverse external shocks has increased, with geopolitical conflicts and fragmentation emerging as key challenges for policymakers, Malhotra said in the Financial Stability Report (FSR) released by the central bank.

The report said that the asset quality of banks improved in March 2026, with the gross non-performing asset (GNPA) ratio declining to a multidecadal low level of 1.8%. The improvement in asset quality was broad-based across bank groups.

However, it said the aggregate GNPA ratio of 46 banks may edge up from 1.8% in March 2026 to 1.9% by March 2028 under the baseline scenario. Under adverse scenarios, it may rise to 3.8% and 4.1%.

“The Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude,” he said, adding that strong growth, low inflation, healthy balance sheets of financial and non-financial firms, as well as ample buffers have helped preserve macro-financial stability. “Nevertheless, we remain alert to evolving external and domestic risks, and are committed to further strengthening the guardrails that protect our economy and financial system from potential shocks,” he said.

According to him, the report reaffirms the strength of the domestic financial system. “Banks and non-banking financial institutions remain sound, supported by strong capital and liquidity positions, healthy profitability, low levels of non-performing assets, and robust credit growth. Stress tests indicate that the financial institutions are well-positioned to withstand adverse shocks,” he said.

Malhotra said the global financial stability risks remain elevated. “Inflationary pressures may require major advanced economy central banks to maintain a hawkish policy stance, potentially tightening global financial conditions,” he said. Meanwhile, vulnerabilities associated with high public debt, bond market fragilities, stretched asset valuations, and the growing footprint of leveraged non-bank financial intermediaries could amplify the impact of future shocks, he said.

Despite ongoing conflicts and persistent supply chain disruptions, the global economy remained resilient — buoyed partly by optimism around potential AI-driven productivity gains, Malhotra said.

The governor said that the financial markets, notwithstanding the volatility posed by global uncertainties, have been functioning in an orderly manner. “The financial system remains a key source of strength and support for the real economy and India’s growth momentum,” he said.

Recognising the need to maintain public confidence in the financial system, he said that it requires more than just prudential soundness. Policies that promote fair conduct and improve customer experience are equally important. “Our objective, therefore, remains unchanged: we want to foster a financial system that is not only resilient and stable, but also efficient, inclusive, and dynamic — a system which supports businesses and households to participate and grow in a well-functioning economy,” Malhotra said.

According to the report, the annual slippage ratio steadily moderated over the last four financial years to 1.2% in 2025-26, driven by lower fresh accretions to impaired assets in PSU banks and private banks.

Credit quality improved across all broad economic sectors. Agriculture — despite improvement — continued to exhibit the highest GNPA ratio of 5.1% and accounted for the largest share in scheduled commercial banks’ (SCB) GNPAs at 37.2% in March 2026, the FSR said.

Within industry subsectors and personal loans category, asset quality broadly improved across all segments. The share of large borrowers in total credit of SCBs increased marginally to 44.5% as at end March 2026. However, their share in gross NPAs saw steady decline. Asset quality of large borrowers improved across bank groups, with the aggregate GNPA ratio declining sequentially to 1.2% as at end-March 2026 from 2.4% as at end-September 2024, it said.

George Mathew is an Associate Editor with The Indian Express, based in Mumbai. A veteran of financial journalism with nearly three decades of experience, he is one of the country’s most authoritative voices on banking, regulation, and the corporate sector. Expertise & Focus Areas Mathew’s reporting covers the nerve center of India’s economy. His specialized beats include: The Reserve Bank of India (RBI): He has tracked the central bank's policy evolution through the tenures of multiple Governors, offering deep insights into monetary policy, repo rates, and banking regulation. Banking & Insurance: Extensive coverage of public and private sector banks, non-performing assets (NPAs), and key legislative reforms like the Insurance Amendment Bills. Corporate Affairs: Mathew frequently breaks major stories related to India's largest conglomerates, with a specific focus on the Tata Group, documenting boardroom shifts and strategic decisions. Financial Markets: Reporting on the complexities of Foreign Portfolio Investors (FPIs), IPOs, and currency fluctuations. Authoritativeness & Insight With a career dating back to the late 1990s, Mathew possesses a rare institutional memory of India’s financial liberalization and market crises. His work is not limited to daily news; he frequently contributes to the "Explained" section, where he decodes complex financial legislations and market trends for a broader audience. His rigorous reporting has also been featured in scholarly platforms like the Economic and Political Weekly (EPW). Find all stories by George Mathew here ... Read More

Growing geopolitical fragmentation and technological disruption brought about by rapid advances in artificial intelligence (AI) are the two forces reshaping the global economy and the financial system, said the Reserve Bank of India (RBI) Governor Sanjay Malhotra on Tuesday.

The risk of adverse external shocks has increased, with geopolitical conflicts and fragmentation emerging as key challenges for policymakers, Malhotra said in the Financial Stability Report (FSR) released by the central bank.

The report said that the asset quality of banks improved in March 2026, with the gross non-performing asset (GNPA) ratio declining to a multidecadal low level of 1.8%. The improvement in asset quality was broad-based across bank groups.

However, it said the aggregate GNPA ratio of 46 banks may edge up from 1.8% in March 2026 to 1.9% by March 2028 under the baseline scenario. Under adverse scenarios, it may rise to 3.8% and 4.1%.

“The Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude,” he said, adding that strong growth, low inflation, healthy balance sheets of financial and non-financial firms, as well as ample buffers have helped preserve macro-financial stability. “Nevertheless, we remain alert to evolving external and domestic risks, and are committed to further strengthening the guardrails that protect our economy and financial system from potential shocks,” he said.

According to him, the report reaffirms the strength of the domestic financial system. “Banks and non-banking financial institutions remain sound, supported by strong capital and liquidity positions, healthy profitability, low levels of non-performing assets, and robust credit growth. Stress tests indicate that the financial institutions are well-positioned to withstand adverse shocks,” he said.

Malhotra said the global financial stability risks remain elevated. “Inflationary pressures may require major advanced economy central banks to maintain a hawkish policy stance, potentially tightening global financial conditions,” he said. Meanwhile, vulnerabilities associated with high public debt, bond market fragilities, stretched asset valuations, and the growing footprint of leveraged non-bank financial intermediaries could amplify the impact of future shocks, he said.

Despite ongoing conflicts and persistent supply chain disruptions, the global economy remained resilient — buoyed partly by optimism around potential AI-driven productivity gains, Malhotra said.

The governor said that the financial markets, notwithstanding the volatility posed by global uncertainties, have been functioning in an orderly manner. “The financial system remains a key source of strength and support for the real economy and India’s growth momentum,” he said.

Recognising the need to maintain public confidence in the financial system, he said that it requires more than just prudential soundness. Policies that promote fair conduct and improve customer experience are equally important. “Our objective, therefore, remains unchanged: we want to foster a financial system that is not only resilient and stable, but also efficient, inclusive, and dynamic — a system which supports businesses and households to participate and grow in a well-functioning economy,” Malhotra said.

According to the report, the annual slippage ratio steadily moderated over the last four financial years to 1.2% in 2025-26, driven by lower fresh accretions to impaired assets in PSU banks and private banks.

Credit quality improved across all broad economic sectors. Agriculture — despite improvement — continued to exhibit the highest GNPA ratio of 5.1% and accounted for the largest share in scheduled commercial banks’ (SCB) GNPAs at 37.2% in March 2026, the FSR said.

Within industry subsectors and personal loans category, asset quality broadly improved across all segments. The share of large borrowers in total credit of SCBs increased marginally to 44.5% as at end March 2026. However, their share in gross NPAs saw steady decline. Asset quality of large borrowers improved across bank groups, with the aggregate GNPA ratio declining sequentially to 1.2% as at end-March 2026 from 2.4% as at end-September 2024, it said.