Banks Prepare for Rising Credit Costs in FY26
New Pressures in Unsecured Lending and Microfinance
Banks might face higher credit costs in Financial Year (FY) 2026. This is because of new pressures in unsecured lending and microfinance sectors, according to CareEdge Ratings.
Banks Ready for Possible Losses
Banks are prepared to handle possible losses. They have strong provision buffers and high provision coverage ratios (PCRs).
- Public Sector Banks (PSBs) have built strong financial provisions over the past 18-24 months.
- PSBs have a strong PCR of 75 to 80 percent. This shows they have enough reserves to cover stressed assets.
- Private sector banks have fewer NPAs. But they work with a slightly lower PCR of around 74 percent.
Credit Costs Have Been Falling
Credit costs have been falling. They went from 0.86 percent in FY22 to 0.47 percent in FY24. Then, they dropped further to 0.41 percent in FY25. But this trend might change because of new stress in some lending segments.
Expert Opinions
Sanjay Agarwal is a Senior Director at CareEdge Ratings. He shared his thoughts:
- Net additions to NPAs have stayed low. This has led to a steady improvement in asset quality.
- Stress in the personal loans segment might cause more fresh slippages.
- Recoveries and upgrades will likely slow down gradually.
What’s Expected in the Future
The SCB GNPA ratio might get slightly worse by the end of FY26. But it should stay between 2.3 to 2.4 percent. This is because of more slippage in some areas and stress in unsecured personal loans. However, corporate deleveraging and a declining trend in the stock of GNPAs might help balance this.
Main Risks to Watch
- Asset quality might get worse because of high interest rates.
- Changes in regulations could cause problems.
- Global issues like tariff increases might also affect banks.
