Indian Banks Offload $2.7 Billion in Retail Bad Loans as Digital Lenders Post Record Growth

Indian Banks Offload $2.7 Billion in Retail Bad Loans as Digital Lenders Post Record Growth

Indian banks sold ₹24,814 crore ($2.7 billion) in retail non-performing assets to Asset Reconstruction Companies in the fourth quarter of fiscal 2026, a 173% jump from the previous quarter, signaling an aggressive push to clean balance sheets even as the country's digital lending sector posts double-digit revenue growth.

The surge in retail loan sales marks a notable shift in India's banking sector cleanup strategy. While banks have historically offloaded corporate bad debt to ARCs, the latest quarter saw retail NPAs—including consumer loans, credit cards, and personal lending products—dominate the distressed asset sales pipeline. Total NPA sales across all categories reached ₹69,300 crore in Q3 FY26, up from ₹37,400 crore in Q2, with retail loans accounting for roughly ₹25,000 crore of Q3 sales compared to just ₹9,000 crore the prior quarter.

The cleanup comes as India's banking system navigates a credit-deposit imbalance that has CFOs and treasury teams on edge. As of January 2026, bank credit grew 12% year-over-year to ₹22.3 lakh crore ($245 billion), while deposits expanded just 10% to ₹23 lakh crore ($253 billion). The incremental credit-deposit ratio—a measure of how much new lending is funded by new deposits—hit 97%, leaving little cushion for banks that need liquid funding sources.

Against this backdrop, India's fintech lenders are posting results that suggest the digital lending model may be maturing past its cash-burn phase. Fibe, a consumer lending platform, reported operating revenue of ₹1,228 crore ($135 million) in fiscal 2025, up 49% year-over-year, while profit rose 13%. Progcap, which finances small businesses, nearly doubled revenue to ₹268 crore ($29.4 million) and slashed losses 87% to just ₹6 crore ($660,000).

Capital Small Finance Bank raised its annual growth target to 23-24% and aims to double its loan portfolio to ₹16,000 crore ($1.7 billion) by March 2029, an ambitious goal given the sector's funding constraints.

Meanwhile, several major banks—including ICICI Bank, Bank of Baroda, Bank of India, Yes Bank, and IDFC First Bank—have shifted their ATM management to fixed-price contracts rather than transaction-based arrangements, a move that could signal either cost discipline or an acknowledgment that cash withdrawal volumes have plateaued despite India's rapid digital payments adoption.

The retail NPA sales raise questions about what's actually sitting in India's consumer loan books. The 173% quarter-over-quarter spike suggests either a sudden deterioration in retail credit quality or, more likely, that banks are finally addressing problem loans they've been reluctant to recognize. For CFOs at Indian banks, the calculus is straightforward: selling NPAs to ARCs clears the balance sheet and frees up capital, even if it means taking a haircut on recovery values.

What remains unclear is whether this retail loan cleanup is a one-time event or the beginning of a broader reckoning in India's consumer credit market, which expanded rapidly during the pandemic-era digital lending boom. The answer will likely emerge in the coming quarters as banks report their full-year results and reveal whether the NPA sales were surgical strikes or the first wave of a larger deleveraging cycle.