These shifts, combined with strong economic growth prospects and reduced inflation risks, are credit positive for the sector, global ratings agency Fitch said in a report.
“We believe that supervisory responses to stress events, risk monitoring frameworks and recovery of non-performing loans have improved in recent years. Consequently, weaknesses that contributed to the latest spike in non-performing loans between the financial year ending March 2016 (FY16) and FY18 have been significantly reduced,” the report said.
The banking system’s metrics are the strongest in years. However, some more recent reforms have not been tested in a down cycle, the report said, adding that the non-performing loan sector fell to 2.2 percent in the first half of FY26 (from a peak of 11.2 percent in FY18). The common equity Tier 1 ratio increased to 14.8 percent, compared to estimates of 9.3 percent in FY14.
The sector’s return on assets is also comparable to comparable banking systems in the Asia-Pacific region, with a ‘bbb’ category operating environment, which has been around 1.3 percent in recent years, the report said.
“We believe that the implementation of an ECL framework should contribute to reduced volatility by helping to stabilize profits across the cycle,” the report said.
In the medium term, the country’s robust economic growth (above 6 percent over the next two years) should continue to provide banks with ample opportunities for profitable lending growth, the report said.
“We estimate the banking sector’s credit-to-GDP ratio at 59 percent in 2025, which remains below the peer average of 101 percent, suggesting there is scope for credit growth to moderately exceed nominal GDP growth over the medium term without posing major risks to system stability, if underwriting standards hold,” the report said.
Published on January 6, 2026
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