New Delhi, Jan. 2 -- The Reserve Bank of India's (RBI) recent report on 'Trends and Progress of Banking in India 2024-25' is reassuring overall. It says the Indian banking sector remained resilient, underpinned by strong balance sheets, sustained profitability, steadily improving asset quality and high capital buffers.

Bad loans are at a multi-decade low. Non-banking financial companies (NBFCs) also recorded robust performance, supported by double-digit credit growth, improved asset quality and comfortable capital cushions.

On the face of it, all is well. However, a close read reveals a disturbing trend that could potentially endanger financial stability: the growing role of NBFCs and their close inter-connectedness with banks. A single...