Stress in personal loans to alter asset quality trajectory: CareEdge

CareEdge expects a marginal rise in credit costs and gross NPAs in FY26 due to stress in unsecured personal loans and microfinance, though provisioning remains robust

The rating agency CareEdge on Thursday said the asset quality cycle for lenders in India is expected to turn in the current financial year (FY26), with stress in the personal loan segment and an overall rise in fresh slippages. The credit costs of commercial banks are projected to inch up to 0.45 per cent in FY26 from 0.41 per cent in FY25.

 

Gross non-performing assets (NPAs) may rise to 2.4 per cent by March 2026 from 2.3 per cent in March 2025, the rating agency said in its asset quality review report.

 

Given the benign asset quality environment, banks have witnessed a declining trend in credit costs, which has significantly improved their overall profitability. Credit costs declined from 0.86 per cent in FY22 to 0.47 per cent in FY24 and 0.41 per cent in FY25. However, CareEdge noted that credit costs have already bottomed out and, given significant extant provisions, are expected to normalise. 

 

 

CareEdge said that along with stress in the unsecured loan portfolio (on the shorter end of the tenure) and in segments such as microfinance, credit costs are anticipated to inch up in FY26 as banks continue to maintain sufficient headroom in provision coverage ratios.

 

Public sector banks, in particular, have a high provision coverage ratio (PCR) of 75–80 per cent, indicating low incremental provisioning requirements and potential upside in case of recoveries of NPAs. In contrast, private sector banks have relatively lower NPAs, with their PCR standing at around 74 per cent.

 

As for the trend in outstanding bad loans, the agency said net additions to NPAs have remained broadly low, enabling the sector to witness a steady reduction in headline asset quality figures. The scheduled commercial banks' (SCB) gross NPA (GNPA) ratio is projected to deteriorate marginally but remain broadly stable—from 2.3 per cent at the end of FY25 to 2.3–2.4 per cent by FY26, it added.