Bank GNPAs to Remain Stable by FY26 Despite Retail Stress: Report

Gross non-performing assets (GNPA) of Indian banks are likely to remain contained through FY26-end, even as incremental stress builds up in unsecured personal loans and microfinance portfolios, according to a new report by CareEdge Ratings. The agency said it expects the GNPA ratio of scheduled commercial banks (SCBs) to remain in the range of 2.3-2.4 per cent by the end of the current fiscal year, supported by sustained corporate deleveraging and a steady decline in the overall stock of legacy bad loans.

The positive outlook follows a further improvement in asset quality in the June quarter. The GNPA ratio of SCBs declined to 2.3 per cent as of Q1 FY26, compared with 2.7 per cent a year earlier. In absolute terms, gross NPAs fell 9.5 per cent year-on-year to Rs 4.18 lakh crore as of June 2025. Net NPAs also remained at a multi-year low of 0.5 per cent in the June quarter, compared with 0.6 per cent in the corresponding period last year.

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However, the report flagged a sequential uptick in fresh slippages emanating from the unsecured retail segment and the microfinance business of some lenders. As a result, the GNPA stock inched up 0.5 per cent quarter-on-quarter during Q1, while net NPAs rose 2.5 per cent sequentially.

This, coupled with proactive provisioning by private sector lenders, pushed up the aggregate credit cost for SCBs to 0.61% (annualised) in Q1 FY26 from 0.41% in the year-ago period. Credit cost for private banks jumped by 172 per cent year-on-year in the June quarter, primarily due to higher incremental provisioning buffers.

Despite these emerging pockets of stress, healthier corporate balance sheets and declining legacy NPAs are expected to provide a strong cushion to the overall banking system.

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The rating agency noted that while credit costs have improved, the latest trends are mixed, with public sector banks (PSBs) benefiting from improved asset quality and lower or stable credit costs, whereas private sector banks (PVBs) faced higher provisioning requirements due to increased slippages. 

However, key downside risks remain, such as continued weakness in low-ticket unsecured loans, potential impact of U.S. tariff changes, a global economic slowdown, and regulatory changes that could weigh on asset quality and overall credit growth.