Indian Banks' NPAs to Stay Low at 2-2.2% by 2027 Despite Risks: Crisil

Crisil's base case assumes the conflict-led disruption and stabilization will last 3-4 months in the current fiscal, moderating GDP growth to 7.1 per cent this year from 7.6 per cent last year, with risks tilted to the downside. Yet, the banking sector's overall NPA trajectory is expected to remain "range-bound."

The corporate segment, which made up 36 per cent of bank credit in March 2026, is expected to see stable gross NPAs of 1.2-1.3 per cent by March 2027, in line with an estimated 1.2 per cent as of March 2026. This is despite multiple sectors facing hits from the gas supply shock, crude-linked cost increases, direct trade exposure, and rupee depreciation. Crisil said India Inc's healthier balance sheets are the key buffer, with gearing at 0.53x as of March 31, 2026 and interest coverage at 5.2x in fiscal 2026 -- a sharp improvement from 1.1x and 2.9x a decade ago.

A Crisil stress test of 30 sectors, covering 65 per cent of rated corporate debt exposed to the conflict, shows 23 sectors will see limited impact on credit profiles. Six could see a moderately negative impact and only one, ceramics, faces an adverse impact. Together, the seven impacted sectors account for less than 7 per cent of rated corporate debt.

The MSME segment, 19 per cent of bank credit, is more exposed. Crisil projects gross NPAs in MSME loans to rise modestly to 3.4-3.6 per cent this fiscal from 3.2 per cent last fiscal. "MSMEs typically have limited financial muscle to absorb higher input costs, supply-chain disruptions and working capital elongation resulting from the ongoing West Asia conflict," said Subha Sri Narayanan, Director, Crisil Ratings.

However, government and regulatory measures, including the recently announced RELIEF scheme, are expected to limit stress. Crisil also expects additional support, such as credit guarantee schemes for affected sectors, similar to Covid-era interventions. As a result, the uptick in MSME NPAs will be driven largely by seasoning of the portfolio, which grew at a 20 per cent CAGR over the past three fiscals. Earlier, MSME NPAs had declined due to better underwriting, rising formalisation, and healthier bank balance sheets that allowed higher write-offs.

Retail loans, 33 per cent of bank credit, should see gross NPAs steady at 1.1-1.3 per cent this fiscal. Housing loans, over 45 per cent of the retail book, continue to show healthy asset quality with gross NPAs at 1 per cent. In the unsecured segment, which is over a quarter of retail advances, banks have taken corrective steps and newer vintages are performing better. "As these newer vintages constitute an increasing share of the book, gross NPAs in this segment should not rise materially above the current 1.8 per cent," said Vani Ojasvi, Associate Director, Crisil Ratings. Still, early-bucket delinquencies in unsecured loans warrant attention given rising household debt.

Agriculture, 12 per cent of credit, remains sensitive to rainfall. With monsoons expected to be below normal for the first time in 11 years, the portfolio is monitorable.

Crisil stressed that asset quality will stay range-bound in the base case, but "the duration and intensity of the West Asia conflict, as well as government and regulatory measures to manage its impact, will bear watching." For now, strong corporate metrics, policy backstops for MSMEs, and a stabilising unsecured retail book should help banks keep NPAs in check through March 2027.

- ANI