The banking sector is facing concerns as the risk of loan defaults or non-performing assets (NPAs) is expected to rise in the current fiscal year. Private banks, in particular, might experience increased pressure due to risky retail and MSME (Micro, Small, and Medium Enterprises) loans without collateral. This outlook was detailed in a report released on Tuesday by rating agency ICRA.
Rising NPA Risks in Private Banks
According to ICRA, private banks could see a relatively higher rate of loans becoming NPAs in the second half of fiscal year 2026-27. While the overall cost of bad loans is predicted to remain moderate and far below historical peaks, the volume of stressed loans is expected to increase, primarily driven by unsecured retail and MSME lending, which dominate private banks’ loan portfolios.
The rating agency estimates that the new NPA formation rate will stand at 0.8% for public sector banks and 2.5% for private banks this fiscal year. In monetary terms, NPAs for public banks might amount to ₹1 lakh crore, whereas private banks could see NPAs totaling ₹1.3 lakh crore. Despite this rise, ICRA expects the banking industry’s profitability to remain robust, supported by favourable borrowing costs and adequate capital buffers.
Key Financial Metrics and Growth Projections
ICRA expects the gross NPA ratio to marginally rise to around 1.7-1.8% by March 2027, up from 1.7% in June 2026. The net NPA ratio is forecast to be between 0.4% and 0.5%, a slight increase from 0.4% recorded in June 2026. Loan growth is predicted at 15.1-15.9%, translating to new lending worth ₹32.3-33.8 lakh crore during this period.
However, geopolitical risks and inflationary pressures pose challenges to these growth expectations. Additionally, maintaining strong deposit growth in the latter half of the fiscal year will be critical as banks exhaust available liquidity.
Interest rates fluctuations could benefit banks’ net interest margins (NIMs). ICRA noted that loan interest rates tend to adjust faster than deposit rates during rate cycles, potentially enhancing net interest margins. The report also highlighted non-banking financial companies (NBFCs), projecting their assets under management to grow 15-17% in FY 2026-27 and 14-16% in FY 2027-28.
Nonetheless, NBFCs are likely to face higher borrowing costs, with average funding expenses expected to increase by 0.10-0.20% in the current fiscal. To support growth and refinance existing debts, NBFCs and housing finance companies may require an additional ₹6.9-7.1 lakh crore in funds during the year.
The overall outlook suggests that while loan defaults may rise, particularly in private banks, the sector is poised to remain profitable supported by favourable interest rates and capital positions. Still, ongoing external risks require close monitoring to safeguard banking stability.
