MUMBAI: The best of times may be over for banks and finance companies as an adverse impact of the West Asia conflict and deficit monsoon conditions begin to weigh on their asset qualities. The formation of fresh stressed loans may rise in the second half of the current financial year, rating agency ICRA said on Tuesday.
Slippages may grow for both, but will remain under control. MSMEs, due to potential oil shocks, supply chain disruptions and inflationary pressures, remain vulnerable, the agency said in a report. Loans to MSMEs and unsecured personal credit accounted for around 17% of the overall non-food bank credit of Rs 223 lakh crore as of August 2026.
Ashish Modani, senior vice president and group head – financial sector, ICRA, said the effects are likely to be seen in the third and fourth quarters. The emerging asset quality challenges in the retail and MSME sectors could increase credit costs and impact profitability.
With higher share of unsecured retail and MSME loans, private sector banks saw relatively higher slippages in the last two years, ICRA said, adding that the trend is likely to continue in H2FY27.
The annualised fresh bad loan generation rate for private banks stood at 1.4 % in Q1. This is expected to rise marginally to 1.6% by March 2027. The trend for public sector banks (PSBs) is expected to be similar, but of less intense. The fresh NPA generation rate may inch up to 0.8% for FY27 from 0.7% in Q1FY27.
The fresh bad loan formation has been on a consistent decline after hitting its peak in FY22, touching 3.5% for private lenders. It fell to 1.4% in Q1FY27. PSBs followed a similar pattern, with a peak of 2.8% in FY22 and moderating to 0.7% in the April-June quarter.
The credit provisions as percentage of advances may inch up for private banks to 0.8% for FY27 from 0.6% in Q1. PSBs may see the rise from 0.3% in June 2026 to 0.4% by March 2027. “Credit costs will remain favourable and much lower than historical levels”, the agency said. Credit costs for private banks declined from a peak of 1.4% in FY22 to 0.6% in Q1FY27 and these provisions fell from 1.2% to 0.3%.
ICRA said it does not forecast higher interest rates or inflation to translate immediately into a broad-based deterioration in headline asset quality, particularly as long as credit flows from banks to NBFCs, and onward to underlying borrowers, remain healthy. However, some pressure in the softer delinquency buckets cannot be ruled out, Modani said.
Source: The Financial Express
