‘Banks’ fresh slippages to rise amid stress in retail and MSME segment’

Mumbai: Fresh slippages in the banking sector are expected to rise in the near term due to emerging stress in the retail and MSME segments, even as overall asset quality remains strong, a report said on Wednesday.

Despite this, the report expects the impact on overall asset quality to remain limited, with GNPAs and net NPAs (NNPAs) projected to stay at benign levels, the report by ICRA and ASSOCHAM said.

The report said the sector’s headline asset quality metrics continue to improve, with gross non-performing assets (GNPAs) at a decadal low, supported by contained slippages and steady recoveries that have reduced the stock of bad loans.

Further, on the credit growth front, ICRA expects a slightly higher credit growth of Rs 25-26 lakh crore, or 13.7-14.3 per cent year-on-year growth for FY26. For FY27, credit expansion is expected to be Rs 23.50-25 lakh crore.

ICRA expects credit demand to remain buoyant, with retail and MSME segments continuing to be the key growth drivers.

The beginning of FY26 saw a slow credit offtake as banks remained cautious towards the retail segment and non-banking financial companies (NBFCs), while corporates preferred bond markets amid low yields.

Credit growth, however, picked up by the end of the first half of FY26 and the momentum continued into the Q3FY26, aided by sustained economic activity and demand for channel financing and retail loans following the goods and services tax (GST) cut on September 22, 2025.

Banks also remained competitive with bond markets due to sticky bond yields, supporting loan growth during the period, the report said.

Additionally, a change in the reporting cycle, to the 15th and end of every month from the earlier alternate Friday system led to higher reported credit offtake in Q3FY26, resulting in one of the highest-ever increases in fortnightly credit flow as of December 31, 2025.

Consequently, incremental credit growth in the first nine months of FY26 stood at Rs 20.3 lakh crore, significantly higher than Rs 11.6 lakh crore in the same period last year and Rs 18 lakh crore for the full FY25. Before the reporting change, incremental credit growth was Rs 12.4 lakh crore as of November 28, 2025, compared to Rs 10.5 lakh crore a year ago, the report added.

Further, the report said that the asset quality of NBFCs has remained under pressure over the past two years, with slippages rising across most segments. Lenders have increasingly resorted to accelerated technical write-offs to keep the stock of stressed assets under control. As a result, while underlying delinquencies have edged up gradually, headline sectoral delinquency levels have remained relatively contained.

Stress has been most pronounced in unsecured segments such as microfinance, unsecured and quasi-secured SME loans, and personal and consumer loans.

Even secured portfolios like vehicle finance and loan against property (LAP) are witnessing moderate increases in delinquencies due to the seasoning impact amid slowing growth. ICRA also flagged risks from borrower overleveraging, especially where profiles overlap with unsecured exposures.

Overall, credit costs for NBFCs are expected to rise by 0.10-0.30 per cent in FY26 before stabilising and remaining range-bound in FY27.