Unsecured Personal Loans Push Up NPA Risk For Indian Banks In FY26

Non-performing assets (NPAs) in India’s banking sector are likely to rise slightly in the first half of FY26, mainly due to increasing stress in the retail loan segment. A report by CareEdge Ratings projects a marginal increase in the Gross NPA (GNPA) ratio for Scheduled Commercial Banks (SCBs), rising from 2.3% at the end of FY25 to around 2.3–2.4% by the end of FY26.

The report stated, “With the personal loans segment facing stress, especially unsecured personal and microfinance loans, the overall fresh slippages are expected to rise.” It noted that although NPAs saw a continued downward trend in FY25, a potential uptick is anticipated from FY26 onwards.

Unsecured and Microfinance Loans Under Pressure

CareEdge highlighted that the rising pressure primarily stems from the unsecured personal loan and microfinance categories. The report added that while retail loans remain the main concern, this risk would be partially offset by corporate deleveraging and a steady decline in the stock of legacy GNPAs.

The GNPA ratio has improved significantly over the past five years, declining consistently since March 2019. Even during the COVID-19 pandemic, the trend persisted due to regulatory relief measures, including forbearance in NPA recognition and loan moratoriums. By the end of Q4 FY25, the GNPA ratio stood at 2.3%.

Improvement in Asset Quality Slows Down

The report noted that banks have achieved asset quality improvements through recoveries, increased write-offs, and lower slippages. All banking groups witnessed a reduction in slippages during FY25. However, private sector banks (PVBs) continued to show a higher slippage ratio than public sector banks (PSBs).

CareEdge attributed this to unsecured lending to individuals and small businesses, which contributed to the increased NPA formation in private banks. Despite the overall improvement in asset quality, the retail and services sectors still show signs of strain.

In the services sector, the GNPA ratio dropped significantly from 7.2% in March 2020 to 2.3% by December 2024. However, retail NPAs continue to face stress, especially from credit card dues, education loans, and unsecured personal loans.

Structural Shift in Lending Patterns Observed

The report identified a structural shift in India’s credit landscape, with banks increasingly focusing on retail lending. This change is backed by higher access to personal credit and reduced corporate borrowing, driven by deleveraging and alternative financing sources.

As of December 2024, household debt in India stood at 42.1% of GDP, still low by emerging market standards but on a steady rise over the past three years. According to the report, sub-prime borrowers mostly use loans for consumption, while super-prime borrowers use debt to build assets, primarily through housing investments.

CareEdge concluded that while the overall asset quality remains healthy, rising stress in the unsecured retail segment could lead to an increase in fresh slippages and slower recoveries in the near term.

(With Inputs From ANI)

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