Microfinance recovery to help SFB gross NPAs decline in FY27: Crisil

Improvement will be driven by a recovery in microfinance credit performance and a rising contribution from non-microfinance loans, where asset quality is expected to remain stable

Asset quality at small finance banks (SFBs) is expected to improve in the financial year ending March 2027, with gross non-performing assets (NPAs) projected to decline by about 120 basis points (bps) to 2.6-2.8 per cent by FY27, from 3.8 per cent and 4.4 per cent as of FY26, according to a report from Crisil Ratings. One basis point is a hundredth of a percentage point.

 

Crisil Ratings noted the improvement will be driven by a recovery in the credit performance of the microfinance portfolio, alongside continued growth in, and a rising contribution from, the non-microfinance portfolio, where asset quality is expected to remain stable.

 

Over the past two fiscals, the microfinance portfolio experienced elevated credit stress owing to borrower overleveraging. As a result, despite accounting for only around 30 per cent of advances, the segment contributed disproportionately to overall delinquencies. In response, SFBs recalibrated growth, strengthened underwriting practices and tightened risk management standards, including alignment with the microfinance industry's Guardrails 2.0 framework. Overall, SFBs appear to be moving beyond the recent stress cycle, supported by stronger underwriting standards and healthier performance from newer microfinance vintages.