With geopolitical pressures persisting, asset quality of scheduled commercial banks, especially in the MSME and retail segments, is expected to take a hit in the current financial year, analysts at ICRA said in a webinar on Wednesday.
Since banks were not getting any demand from the corporate segment, they turned towards lending to segments such as MSME and retail, which were the incremental drivers of credit in FY26.
“If anything happens on the MSME front, or if there is any second order impact on the retail unsecured book, then there could be some asset quality pressures,” Sachin Sachdeva, Vice President and Sector Head at ICRA said.
The rating agency has revised its real GDP growth forecast for FY27 to around 6.5% from its earlier projection of about 7.1%, assuming an average crude oil price of $85 per barrel. Higher oil prices amid ongoing geopolitical tensions could weigh on consumption and investment, posing downside risks to growth.
Slippage rate to also inch up for banks
ICRA expects the slippage rate to also inch up for banks, their base case being 1.5%. “While private sector banks continue to report higher slippage rates than public sector banks owing to their greater exposure to unsecured retail and MSME portfolios, the overall asset quality is projected to remain manageable,” Sachdeva added. The rating agency expects the gross non-performing asset (GNPA) ratio to stay benign at 2.0-2.1% in FY27.
However, if the conflict-induced pressure persists for a longer period, then as per ICRA’s estimate, every 50 basis points (bps) increase in the fresh NPA generation rate would reduce the return on average assets (RoA) by 9-10 bps and the return on equity (RoE) by 95-100 bps.
ICRA expects the RoA and RoE at 1.2-1.3% and 12.3-13.2%, respectively, in 2026-27 though this would remain sufficient to fund the sector’s credit growth.
What do analysts say?
This impact would also trickle down towards rising credit costs in FY27, ultimately affecting the profitability of banks, analysts said.
The rating agency expects credit growth to moderate to sub-12% in the current financial year from the highs of 15.9% in FY26, as banks are likely to turn cautious in lending to these vulnerable segments. ICRA has projected credit growth at 11.0–11.7% in FY27, translating into incremental credit expansion of Rs 23.5–25 lakh crore.
Deposit growth for banks improved by the end of the financial year, which led to a moderation in the credit-deposit ratio to 81.2% as on March from the highs of 82.7% in January.
Banks have also drawn down surplus liquidity buffers, including excess statutory liquidity ratio (SLR) holdings, to support credit growth, leading to some moderation in liquidity coverage ratio (LCR) levels.
Despite this improvement, deposit mobilisation continues to be a key challenge for banks. ICRA said that the cost of deposits is not expected to decrease materially, keeping net interest margins under pressure in the near term.
ICRA maintained a Stable outlook on the banking sector for FY27, citing comfortable capitalisation levels, manageable asset quality risks and steady profitability despite moderating growth.