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Key Points

Credit costs for Indian banks are expected to decline in the second half of FY2026 according to UBS analysis. However, near-term asset quality pressure will persist with elevated slippages in the coming quarters. NBFCs are showing better performance with improved delinquency trends compared to traditional banks. The report highlights the need for close monitoring of portfolio risks, particularly in key states like West Bengal and Maharashtra.

Key Points: UBS Sees Bank Credit Costs Declining in H2FY26 Despite Slippages

  • Bank credit costs are projected to decline in the second half of FY26 compared to FY25
  • Near-term slippages are expected to remain elevated due to high forward flows
  • NBFCs show better delinquency trends with PAR 1-90 dropping 80bp to 3.2%
  • Portfolio at Risk monitoring is crucial in West Bengal and Maharashtra states
  • Rising deposit costs could strain bank margins in the near term
  • Any sustained economic slowdown may impact credit growth and NPAs
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Bank credit costs likely to decline in H2FY26, near-term slippages to remain elevated: UBS

UBS report forecasts lower credit costs for Indian banks in H2FY26, though near-term slippages remain high. NBFCs show better delinquency trends than banks.

"We continue to expect a decline in credit costs in H2FY26 (vs FY25) but expect near-term slippages (Q2) to remain elevated - UBS Report"

New Delhi, September 30

Credit costs in Indian banks are expected to continue in declining trend in the second half of the current financial year 2025, though near-term slippages are likely to remain elevated, according to a report by global financial services firm UBS.

The report highlighted that while credit costs are expected to ease in H2FY26 compared to FY25, the near-term asset quality pressure, especially for banks, will persist due to high forward flows.

It stated "We continue to expect a decline in credit costs in H2FY26 (vs FY25) but expect near-term slippages (Q2) to remain elevated due to high forward flows, especially for banks".

It emphasized that monitoring of PAR (Portfolio at Risk) 1-90 trends remains crucial, particularly in states such as West Bengal (WB) and Maharashtra (MH), which together account for approximately 17 per cent of the market share. In these regions, early delinquency trends have remained relatively flat.

NBFCs, in comparison, have shown better delinquency trends over the June-August 2025 period. According to the report, early delinquency is coming down; however, forward flows to non-performing assets (NPAs) continue at a high pace, especially in banks.

The report noted that PAR 1-90 for banks declined by 30 basis points (bp) to 3.8 per cent, while for NBFCs, it dropped by 80bp to 3.2 per cent.

Portfolio at Risk (PAR) is a financial metric used to assess the credit risk of a lender's loan portfolio.

For banks and NBFCs, PAR 1-30 decreased by 30bp and 20bp respectively, while PAR 31-90 was flat for banks and down 60bp for NBFCs.

The report further cautioned that while India's economic growth is expected to remain healthy, any sustained slowdown could impact the banking and finance sector. This may lead to slower credit growth, higher risk of NPAs, and pressure on fee income and net interest margins (NIM).

Rising deposit costs could also strain margins, with the report expecting stable-to-declining margins for banks in the near term.

- ANI

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Reader Comments

R
Rohit P
Worried about the high slippages in Q2 though. As someone with investments in banking stocks, this makes me cautious about short-term performance. Maybe NBFCs are better positioned right now.
A
Arjun K
The focus on West Bengal and Maharashtra makes sense - these are major economic hubs. Good to see UBS providing such detailed regional analysis. Indian banking sector needs this level of scrutiny.
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Sarah B
While the report is comprehensive, I wish they had more data on how this affects small businesses. As a small business owner in Pune, banking stability is crucial for our operations and growth plans.
V
Vikram M
NBFCs showing better performance than banks is interesting! Maybe they're adopting better risk management practices. This could be a wake-up call for traditional banks to improve their systems. 💡
M
Michael C
The margin pressure due to rising deposit costs is concerning. As someone with fixed deposits in multiple banks, I hope this doesn't lead to lower FD rates in the coming months.

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