India’s banking sector is likely to maintain controlled levels of bad loans through the end of the current fiscal year, though risks are emerging in export-linked micro, small and medium enterprises (MSMEs) and unsecured retail segments due to global and domestic pressures, according to Crisil Ratings.
Gross non-performing assets (NPAs) are expected to stay within 2.3-2.5 per cent of total advances by March 2026, nearly unchanged from the historical low of 2.3 per cent a year earlier, the rating agency said in a report.
Crisil noted that while corporate credit quality remains stable, loan stress among small firms could edge up modestly. “This fiscal, we see NPAs in the MSME sector increasing moderately to 3.7-3.9 per cent,” said Subha Sri Narayanan, Director, Crisil Ratings. “This is primarily due to the recent, steep hike in tariffs announced by the US, which affects export-oriented MSME sub-segments such as textiles, garments and carpets, gems and jewellery, shrimp and processed seafoods, and certain segments of the chemicals sector.”
The agency added that the high growth of MSME credit in recent years, around 16 per cent compound annual growth over the last three fiscals, is also leading to “organic seasoning”, a natural uptick in delinquencies as loan books mature.
MSMEs, which account for about 17 per cent of total bank credit, have seen a steady decline in gross NPAs from 8.7 per cent in March 2021 to 3.6 per cent in March 2025, aided by government schemes such as the Credit Guarantee Fund for Micro Units (CGFMU) and the Emergency Credit Line Guarantee Scheme (ECLGS). Crisil said improved formalisation of the sector has strengthened banks’ ability to assess and monitor credit risk.
However, the rating agency cautioned that periods of rapid MSME growth have historically been followed by higher defaults. The share of loans overdue by 60-90 days, known as Special Mention Accounts-2 (SMA-2), fell to 0.8 per cent in March 2025 from 1.2 per cent a year earlier, indicating a currently stable asset quality trend.
The corporate loan book, which comprises 38 per cent of total bank credit, continues to display resilience, with gross NPAs expected to hold steady at 1.4-1.5 per cent by the end of this fiscal. Crisil attributed this stability to strong corporate balance sheets, with gearing estimated between 0.4 and 0.55 times and interest coverage ratios above 5 times.
The retail portfolio, accounting for one-third of bank credit, also remains sound. Housing loans — over half of retail credit — continue to perform well. Gross NPAs in retail loans were steady at 1.2 per cent in March 2025, though unsecured retail credit remains an area of concern.
“Retail gross NPAs should remain at around 1.2 per cent as of March 31, 2026,” said Vani Ojasvi, Associate Director, Crisil Ratings. “However, the unsecured portfolio still bears watching. While reported NPAs may appear contained due to aggressive write-offs, continued higher slippages could impact credit costs.”
Unsecured retail loans accounted for roughly 25 per cent of total retail credit, and banks have been actively writing off bad accounts to keep headline NPA ratios low. Despite this, the SMA ratio for unsecured loans remained elevated at 7.4 per cent in March 2025 — unchanged from the previous year.
Crisil concluded that overall asset quality trends in India’s banking sector “should be benign” as bad loan ratios have likely bottomed out. Yet, it warned that global economic uncertainties, such as trade tensions and domestic borrower leverage, particularly in unsecured retail credit, will remain key monitorables in the months ahead.
Sector Outlook And Credit Growth Trends
According to Reserve Bank of India (RBI) data, overall bank credit grew 14.4 per cent year-on-year in 2024-25, driven largely by retail and services sectors, while industrial credit rose a modest 9.5 per cent. The MSME segment, which has been a key growth driver, expanded by around 13 per cent, reflecting rising formalisation and credit outreach under government-backed guarantee schemes.
Rating agency Icra in a report in September 2025, projected gross NPAs for the banking system to remain around 2.5 per cent by March 2026, supported by stable corporate balance sheets and recovery efforts through insolvency proceedings. However, the agency warned that continued pressure on unsecured consumer loans and small-business borrowers could weigh on profitability.
Meanwhile, the State Bank of India’s Ecowrap report in August 2025 noted that the incremental credit-to-GDP ratio reached a decade-high 8.6 per cent in 2024-25, indicating robust lending but also a need for tighter risk monitoring, particularly in unsecured retail credit and MSME exposures. |
