MSME, unsecured retail stress to lift bank NPAs in FY27

After years of steady improvement in asset quality, Indian banks are likely to see a modest increase in fresh non-performing assets (NPAs) in FY27 as stress begins to emerge in MSME and unsecured retail loan portfolios, according to rating agency ICRA.

It said fresh NPA generation is expected to inch up for both public and private sector banks, reflecting the impact of higher interest rates, inflationary pressures and global uncertainties on borrowers.

While public sector banks (PSBs) are projected to see fresh NPA generation rise to 0.8 per cent in FY27 from 0.7 per cent in FY26, private sector banks (PVBs) could witness a sharper increase to 1.6 per cent from 1.4 per cent.

Fresh slippages are estimated at around ₹1 lakh crore for PSBs and ₹1.3 lakh crore for private banks.

Private lenders are expected to face greater pressure owing to their larger exposure to unsecured retail loans and MSME credit, segments that have shown early signs of stress over the past few quarters.

Geopolitical uncertainties

The risks are compounded by geopolitical uncertainties, including elevated crude oil prices and supply-chain disruptions, which could affect the repayment capacity of small businesses and retail borrowers.

Despite the uptick in fresh NPAs, the banking sector is entering the period from a position of strength, with overall gross NPA levels expected to remain contained and credit costs staying below historical averages.

The credit cost is expected to increase marginally and would remain benign and much lower than historical levels. Thus, expecting the profitability of banks to remain largely steady and comfortable in 2026-27.