In This Economy: Basically, Sab Changa Si

Happy Tuesday!

The last week was filled with large corporate deals, with Indian corporates showing signs of enhanced confidence. Whether it be JB Chemicals’ proposed acquisition by Torrent Pharma or JSW Paints agreeing to acquire Akzo Nobel’s India business.

Additionally, Raymond Group listed its realty businesses and Apollo Hospitals is restructuring its business units and will list Apollo HealthTech. These are large deals, being signed by marquee names across the length and breadth of corporate India. Will this momentum hold? Is this a sign of a resurgent India growth story? Questions for later.

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In its latest half yearly Financial Stability Report, Reserve Bank of India  said that Indian financial system is seeing a continuous improvement in resilience. This is "bolstered by strong capital buffers, low non-performing loans and robust profitability," RBI Governor Sanjay Malhotra said in his foreword. With the gross NPA ratio for Indian banks at 2.3% and a net NPA ratio of 0.5%, as of March 2025, asset quality pressures are already at multi-decadal lows. 

Among sectors, agricultural loans, with a gross NPA ratio of 6.1% lead the list, with industry loans at 2.3% coming second.

Disaggregation of NPA movements revealed that write-offs were a major component of NPA reduction over the last 5 years, according to the central bank. Private banks have led the charge with a 45% write-off ratio, while the system stood at nearly 32%. Now write-offs tend to get a bad name, because people see it as a free pass for the defaulters. Lenders always argue that write-offs are only a technical term and that they continue recovery efforts even after writing these loans off. But the track record for banks on these loans has not been good so far.

A stress test by the regulator shows that in a baseline scenario, where everything remains exactly where it is, the gross NPA may rise to 2.5% by March 2027. A baseline scenario involves gross domestic product growth of 6.5% in the current fiscal and 6.7% in the next fiscal. System level capital adequacy too will come down only marginally from 17.2% in March 2025 to 17% in March 2027, the RBI estimates. Of the 46 commercial banks, 37 would continue to hold a capital adequacy ratio of 15% or higher, in the baseline scenario. 

Things start to unravel in the adverse scenario though. In an adverse macroeconomic scenario where the global scenario gets significantly more volatile, Indian banks could report a gross NPA ratio of 5.6%, while their capital adequacy ratio could drop to 14.2%. In another adverse scenario where global growth slows considerably, the gross NPA ratio for Indian banks could rise to 5.3%, while capital ratio could drop to 14.6%.

In fact, India's growth could drop to 30 basis points, if global growth slows by 100 basis points, the RBI noted.

The ingredients of faster growth are there. The recent repo rate and cash reserve ratio cuts make things even better. The government too is apparently encouraging lenders to push more credit. Will banks take the bait and go for growth? That's what we will watch out for now. 

• India-UK free trade agreement may be signed by this month-end, Rishabh Bhatnagar reports.

• India's third largest stock exchange is planning a pivot, as it reels under the expiry day limits, Charu Singh reports. 

• Another exclusive by Charu Singh talks about how a group of scamsters in Ahmedabad duped nearly 4,000 investors. 

• The tax department's lens is on 1.6 lakh tax returns filed in FY25, Shrimi Choudhary reports.

• Pallavi Nahata writes about the financial pressures of being a new parent in 2025.

The Trump-Musk saga took a turn for the worse this week, with the two sparring again on social media. What started as a dispute over Trump's 'Big Beautiful Tax Bill' quickly turned to a mudslinging contest. It reached a point where Trump even warned Musk that he may have to shut shop and move back to South Africa.