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 $2.7 billion worth of 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 reports surging revenues.

The retail loan sales—totaling ₹24,814 crore—mark a sharp acceleration in banks' efforts to shed problem assets, with the overall non-performing asset disposal reaching ₹69,300 crore ($7.6 billion) in Q3 FY26, nearly double the ₹37,400 crore sold in Q2. The shift toward offloading retail loans is particularly notable: banks sold approximately ₹25,000 crore in retail NPAs in Q3, up from just ₹9,000 crore the previous quarter.

For CFOs at India's major lenders, the cleanup comes as credit growth outpaces deposit accumulation at an uncomfortable rate. As of January 2026, bank credit expanded 12% year-over-year to ₹22.3 lakh crore ($245 billion) while deposits grew just 10% to ₹23 lakh crore ($253 billion), pushing the incremental credit-deposit ratio to 97%—a metric that suggests banks are lending nearly every rupee of new deposits they collect.

The balance sheet housekeeping is happening against a backdrop of operational changes at major institutions. ICICI Bank, Bank of Baroda, Bank of India, Yes Bank, and IDFC First Bank have all transitioned from transaction-based ATM management contracts to fixed-price arrangements, a shift that could provide more predictable cost structures but may also reflect pressure on fee income.

Meanwhile, India's digital lending sector is posting growth that makes the traditional banks' 12% credit expansion look pedestrian. Fibe, a consumer lending platform, reported operating revenue of ₹1,228 crore ($135 million) in FY25, up 49% year-over-year, while profit rose 13%. Progcap, which provides embedded lending to small businesses, nearly doubled revenue to ₹268 crore ($29.4 million) and slashed losses by 87% to just ₹6 crore ($660,000).

Capital Small Finance Bank has raised its annual growth target to 23-24%, aiming to double its loan portfolio to ₹16,000 crore ($1.7 billion) by March 2029—a growth rate that would dwarf the system-wide average.

The divergence raises an interesting question for finance executives: are traditional banks selling off retail loans because they've learned something about risk that the digital lenders haven't, or are the fintechs simply better at underwriting the same customers? The 173% quarter-over-quarter jump in retail NPA sales suggests banks are suddenly much more eager to get these loans off their books, which could mean either they're seeing early warning signs in portfolio quality or they're finally getting realistic about valuations.

The credit-deposit ratio offers a clue. At 97%, banks have essentially no cushion—they're deploying nearly all new deposits into loans. That's fine when asset quality is pristine, but it's a recipe for liquidity crunches if defaults tick up. Selling NPAs to Asset Reconstruction Companies frees up capital and regulatory headroom, but it also locks in losses that might have been recoverable.

What CFOs should watch: whether the retail NPA sales continue at this elevated pace, and whether the digital lenders' growth rates hold up as they age into the same vintage of loans that banks are now dumping. The optimistic read is that India's financial system is getting more efficient at risk transfer. The pessimistic read is that someone's going to end up holding a bag of loans that looked great in 2024 but won't in 2027.