Bad loans in unsecured retail credit to peak in FY26, says S&P Global

S&P Global Ratings expects unsecured retail loan stress to crest in FY26 as controls tighten, even as global uncertainty and delayed private capex may weigh on India's loan growth

The bad loan formation in unsecured retail loans - personal and microfinance - in India will peak in the current financial year (FY26), showing the effect of stricter risk management practices, S&P Global Ratings said on Thursday.

 

It also flagged that global uncertainty could affect corporate capex, excluding infrastructure, and thus hurt loan growth in India. Corporate borrowing has gained momentum, but uncertain external conditions may delay private capital expenditure-related growth, it added.

 

While India's low US trade exposure reduces tariff risks, second-order impacts such as trade redirection to India could hit a few sectors such as steel and chemicals, the rating agency warned.

   

The agency in its Global Banks Country-By-Country Outlook said pockets of stress have emerged in some retail segments, namely unsecured personal loans and microfinance loans, which have grown rapidly and are contributing to incremental nonperforming loans (NPLs). Stress for small and midsize enterprises (SMEs), and the commercial vehicle segment has led to a rise in early-stage delinquencies.

 

“We believe underwriting standards for secured retail loans are healthy, and delinquencies in this segment remain manageable. Likewise, tightening regulations and stricter guardrails in microfinance should contain asset quality strains. India's sound growth prospects and falling interest rates will also support banks' asset quality,” it said.

 

In 2023, Reserve Bank of India (RBI) hiked the risk weights on unsecured credit, to control a sharp rise in unsecured loans. Later, the banking regulator eased the norms in 2024. The microfinance industry bodies - MFIN and Sa-dhan - have also capped the number of lenders per borrower to limit a rise in household leverage of low-income borrowers.

 

On bank credit offtake, S&P Global said, “We expect loan growth to remain at 11-12 per cent in FY26, similar to financial year 2025 levels, with retail loans expanding the fastest.”

 

The overall credit has grown by 11.5 per cent year-on-year (Y-o-Y) basis as of October 17, 2025 (similar to 11.5 per cent a year ago) and deposit grew by 9.5 per cent Y-o-Y (slower than 11.7 per cent a year ago), according to the RBI data.

 

Growth prospects for the Indian economy remain good. India's infrastructure spending and private consumption will support robust economic growth. “We see good prospects for the economy over the next couple of years,” it added. Rating agency has pegged growth in India's Gross Domestic Product (GDP) at 6.5-7.0 per cent annually in the FY26-28 period.