Banks may write off stressed loans worth Rs 1.5 trillion in FY26: Icra

Credit growth to expand at 10.8-10.9% on regulatory easing

Commercial banks in India are expected to write off bad loans worth Rs 1.51 trillion in the current financial year (FY26) to further clean up balance sheets, according to ICRA estimates.

 

The rating agency also said bank credit growth in FY26 is expected to be around 10.8–10.9 per cent to Rs 20.2 trillion, showing an upward revision from previous estimates of 9.7–10.3 per cent, according to ICRA estimates. The estimate shows incremental credit expansion to be around Rs 19.0–20.5 trillion as compared to credit expansion of Rs 18.0 trillion or a 10.9 per cent growth rate in FY25. With expectations of a cumulative 75 basis point cut in the policy repo rate starting from February 2025, ICRA anticipates a 15–17 basis point decline in banks’ net interest margins (NIMs) during FY26.

 

The uptick in credit growth is attributed to ease in regulatory provisions by the Reserve Bank of India. However, due to rate cuts in the domestic economy and net interest income (NII) being under pressure, profitability may see a dip of a few basis points, but it will remain around comfortable levels, said the rating agency.

 

On asset quality, ICRA said public sector banks (PSBs) are more active in writing off non-performing assets (NPAs), especially in the final quarter of the financial year. They may remove NPAs worth over Rs 93,000 crore, and their private sector counterparts may write off Rs 57,000 crore in FY26.

 

The write-offs by banks are pegged at Rs 1.37 trillion in the financial year ended March 2025 (FY25), ICRA estimates showed.

 

Bankers said the share of retail credit, especially unsecured credit and small and medium enterprise (SME) business loans, in written-off loans may be substantial given the focus on retail lending in the last few years.

 

The non-performing loans are taken out from books after making 100 per cent provisions spread over many financial years in line with regulatory norms. Thus, the burden for setting aside money as provision does not fall in a single financial year.

 

The Reserve Bank of India data showed the scale of write-offs had risen substantially after the asset quality review (AQR) in the second half of the last decade (2015–18 period). Banks had written off loans worth Rs 1.61 trillion in 2017–18. That number remained over Rs 2 trillion for each of the next three years — Rs 2.36 trillion in FY19, Rs 2.34 trillion in FY20 and Rs 2.04 trillion in FY21, according to data presented in Parliament in March 2025.

 

Meanwhile, ICRA also said asset quality remains monitorable amid broader macro-economic developments, and the fresh NPA generation rate is expected to rise in the next few quarters, while recoveries and upgrades are likely to moderate.

 

Consequently, the quantum of gross NPAs (GNPAs) and credit loss provisions would rise, although the GNPA ratio is estimated to remain range-bound by March 2025 and rise in FY26. Gross NPAs may inch up to 2.6 per cent in FY25 and 2.8 per cent in FY26 from 2.5 per cent in FY24, the rating agency added.

 

The rating agency said as the credit-to-deposit ratio remained elevated, competition for deposit mobilisation will likely remain intense in FY26, limiting the ability of banks to lower deposit rates. “However, lending rates may stay under pressure due to a decline in external benchmark-linked loans and increased competition from debt capital markets,” said Sachin Sachdeva, vice-president and sector head, ICRA.