Indian banks' asset quality has greatly improved in recent years. This indicates a decrease in the quantity of loans that are not being repaid, also referred to as non-performing assets, or NPAs. Higher bank write-offs, improved recoveries, and fewer new bad loans were the primary drivers of this improvement in the banking industry.
However, experts predict that things could get a little worse as we enter the fiscal year 2025–2026 (FY26). This is due to the fact that some loan kinds, particularly microfinance and unsecured personal loans, are growing riskier. These are unsecured loans, and the bank will have a difficult time getting the money back if the borrower defaults.
In the past, banks had to cope with a large number of bad loans as a result of large corporate loans going bad, particularly between 2014 and 2018. The Gross Non-Performing Asset (GNPA) ratio increased from 3.8% in 2014 to 11.2% in 2018 as a result of these loans.
This compelled banks to write down several loans and make huge provisions—money set up to cover losses. Banks began making more retail loans to individuals rather than big businesses in order to prevent such circumstances in the future. Retail loans' percentage rose from 19% in 2015 to 34% in 2025 as a result of this change.
The entire GNPA ratio decreased to 2.3% by the end of FY25, which is encouraging. However, there is still worry, particularly in banks in the private sector. These banks are increasingly exhibiting indications of stress as they offer more credit card loans, personal loans, and other unsecured loans.
As a result, private banks have had more slippages (new non-performing assets) than public sector banks. It is anticipated that the amount of money recovered from previous bad loans will decline and the number of new bad loans will rise marginally in FY26. As a result, the GNPA ratio may marginally increase to between 2.3% and 2.4%.
The agriculture industry has performed better when compared to other sectors. In March 2020, its GNPA ratio was 10.1%; by December 2024, it had dropped to 6.2%. A significant improvement has also been observed in the industrial sector, which fell from 14.1% in March 2020 to just 2.7% in December 2024.
Despite having a low GNPA of 1.2%, retail loans—including credit card bills, student loans, and personal loans—are predicted to experience increased stress in FY26 as a result of an increase in unsecured loan delinquencies. In December 2024, the GNPA ratio for loans to the services sector was 2.3%.
The growing amount of household debt in India, which was 42.1% of GDP as of December 2024, is one major worry. This has been rising gradually, but it is still less than other emerging markets. A large number of low-income or sub-prime borrowers have taken out loans primarily for consumption, such purchasing electronics or handling daily bills.
The likelihood of these debtors defaulting is higher. Conversely, wealthy borrowers have utilized loans to build assets such as homes. Banks may expect an increase in non-performing assets (NPAs) from unsecured loans as stress on these loans rises, particularly in the first half of FY26.
Banks temporarily altered the terms of a large number of loans during the COVID-19 pandemic. The term "restructured standard assets" was used to describe these. These loans are becoming less common since they are either repaid or become non-performing assets.
In general, there are fewer stressed loans overall (bad loans including restructured loans). With ratios ranging from 75% to 80%, public sector banks have taken the initiative to create robust financial cushions, often known as provision coverage. At roughly 74%, private sector banks likewise have respectable provision coverage.
Source - hellobanker.in
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