This study examines the relationship between non-performing assets (NPAs) and financial stability in the Indian banking sector from 2018 to 2024. Using panel data from scheduled commercial banks (SCBs), the research analyzes trends in gross non-performing assets (GNPA), net non-performing assets (NNPA), and key financial stability indicators including capital adequacy ratio (CAR), return on assets (ROA), and return on equity (ROE). The findings reveal a significant improvement in asset quality, with GNPA ratio declining from 11.2% in March 2018 to 2.6% in September 2024, marking a twelve-year low. Public sector banks demonstrated the most substantial improvement, reducing GNPA from 14.58% to 3.09% during this period. Correlation analysis indicates a strong negative relationship between NPA ratios and profitability metrics (r = -0.87, p < 0.01), suggesting that reduced NPAs significantly enhance bank performance. Regression analysis confirms that capital adequacy ratio, provision coverage ratio, and credit growth significantly influence NPA levels. The study concludes that effective NPA management through regulatory reforms, improved recovery mechanisms, and stringent provisioning norms has substantially strengthened financial stability in the Indian banking system. These findings have important implications for banking policy and risk management strategies in emerging economies.