Indian banks should avoid chasing credit growth at the expense of financial stability, the Department of Financial Services (DFS) secretary M. Nagaraju said on Friday, flagging lenders' past challenges with sour assets.
"I want to be emphatic on one point. The pursuit of credit growth must never come at the cost of financial stability. The lessons of the NPA (non-performing asset) crisis of the previous decade are well-learned and must never be forgotten,“ Nagaraju said at the Mint India Investment Summit & Awards in Mumbai on Friday.
As credit expands, maintaining asset quality, strong capital buffers, rigorous underwriting, and robust governance will remain non-negotiable, he added.
“Growth and financial stability must be pursued together, because they are mutually reinforcing. We operate in an environment of global uncertainty, with geopolitical tensions, shifting trade patterns, and evolving monetary policy dynamics across major economies,” he added.
To be sure, Indian banks were burdened with a mountain of bad debt a decade ago, prompting the government and the Reserve Bank of India (RBI) to take several measures to revive the sector. These included the Insolvency and Bankruptcy Code (IBC), asset quality reviews, and bank recapitalization, aimed at cleaning up balance sheets and strengthening financial stability.
Nagaraju said that India’s next growth chapter will be domestically financed, leveraging the scale, diversity, and resilience of a truly world-class financial system.
“What we require now is alignment of capital with opportunity, of institutions with national priorities, and of innovation with inclusion. If India’s growth story is about aspiration, then its financing story must be about scale, speed, and sustainability,” he said.
The secretary affirmed that the department will continue to work closely with the RBI and other sector regulators to ensure that the country’s financial system evolves responsibly. The focus, he said, is not merely on expanding the size of the financial sector, but on strengthening its resilience and maturity.
While talking about the health of the Indian banking sector, he said that it's the strongest it has been in over a decade, and this transformation has been hard-earned.
“Gross non-performing assets, which had reached alarming double-digit levels, have been brought down to approximately 2 to 3 %, a level that benchmarks well against global peers,” he said.
He added that capital adequacy ratio (CAR)—a measure of a bank's buffer to absorb losses—stands at around 17 %, well above regulatory requirements, providing resilience against shocks.
“Profitability has reached record levels, with the banking system generating over ₹4 lakh crore of net profits. Public sector banks (PSBs), once constrained by legacy stress, have emerged stronger through sustained reform, recapitalization, and governance strengthening. This transformation has restored their capacity to support economic growth and reinforced their role as the backbone of India’s financial system,” Nagaraju added.
He also mentioned the country’s achievement in one of the most significant expansions of financial inclusion globally. “Under the Pradhan Mantri Jan Dhan Yojana, over 57 crore bank accounts have been opened, ensuring formal banking services reach every segment of society. Under the PMSBY (Pradhan Mantri Suraksha Bima Yojana) , cumulative enrolments have reached nearly 50 crore. The PMJJBY (Pradhan Mantri Jeevan Jyoti Bima Yojana) has covered over 22 crore individuals,” he added
“If we get this right, India will not just be a large economy, it will be a financial powerhouse that shapes global capital flows. The next decade will define India’s place in the world. Our financial system, anchored by strong banks, deep markets, and trusted institutions, will be the foundation on which this future is built,” he said.
While talking about strengthening governance and risk management. Nagaraju said, “The transformation of PSBs over the past decade demonstrates that governance reform and financial performance go hand in hand,” he said.
He further pointed out that credit appraisal systems must continuously evolve, early warning frameworks must be upgraded, and boards must be strengthened with professional expertise. “Strong governance is not a constraint on growth. It is what makes growth sustainable,” he added.