CareEdge Sees Banks’ Bad Loans Hit Multi-year Low
India’s scheduled commercial banks ended fiscal 2026 with their strongest asset quality in more than a decade, helped by lower stress formation, recoveries from legacy bad loans and reduced provisioning needs, though risks tied to geopolitical tensions in West Asia could surface later this year, according to a report by CareEdge Ratings.The report showed the gross non-performing asset (GNPA) ratio of 29 scheduled commercial banks (SCBs), comprising 14 public sector banks (PSBs) and 15 private sector banks (PVBs), declined to a multi-year low of 1.8 per cent in the fourth quarter of fiscal 2026, compared with 2.3 per cent a year earlier and 1.9 per cent in the previous quarter. Net non-performing assets (NNPA) remained stable at 0.4 per cent for the second consecutive quarter.
Gross bad loans across SCBs fell 10.7 per cent year-on-year to Rs 3.70 lakh crore, while net NPAs declined 8.2 per cent to Rs 0.82 lakh crore, reflecting contained fresh slippages, continued recoveries and upgrades, calibrated write-offs and resolution of legacy stressed assets, the report said.
Public sector lenders outperformed private peers in terms of improvement pace. PSBs’ GNPA ratio fell to 1.9 per cent in Q4FY26 from 2.6 per cent a year earlier, while PVBs’ ratio moderated to 1.4 per cent from 1.7 per cent over the same period, according to CareEdge calculations.
The report said fresh slippages rose marginally on a sequential basis during the quarter, particularly among PSBs, due to seasonal stress recognition linked to agricultural and micro, small and medium enterprise (MSME) loans, which typically see higher recognition in the fourth quarter. However, recoveries and resolution flows continued to outpace slippages, supporting overall asset quality.
CareEdge said banks’ provisioning burden also eased during the quarter. Credit costs for SCBs fell 19.3 per cent year-on-year and 9.1 per cent quarter-on-quarter to Rs 0.25 lakh crore in Q4FY26, aided by lower fresh stress formation and improving recoveries. Annualised credit costs declined to 0.33 per cent from 0.45 per cent a year earlier.
Despite the improvement, the rating agency warned that geopolitical tensions in West Asia, elevated crude oil prices and supply chain disruptions could affect some borrower categories, particularly export-linked and MSME segments, by increasing logistics costs and stretching receivable cycles. While banks had not reported material stress in current portfolios, CareEdge said the impact could become visible from Q2FY27 or the second half of fiscal 2027.
“Asset quality across SCBs remained resilient in Q4FY26, with the sector closing the year at its strongest levels seen in over a decade,” CareEdge Associate Director Saurabh Bhalerao said in the report, adding that healthy recoveries, corporate deleveraging and a gradual reduction in legacy NPAs supported the trend.
CareEdge Senior Director Sanjay Agarwal said growth in net advances across the 29 banks remained strong at 15.3 per cent year-on-year, outpacing deposit growth of 11.2 per cent, while credit costs moderated amid stable recoveries and lower provisioning needs. He said stronger provision buffers, prudent underwriting standards and healthier corporate balance sheets should help the sector withstand potential shocks.
The report forecast SCB GNPA ratios to remain broadly range-bound at 1.9 per cent to 2.0 per cent in FY27, although moderate stress could persist in select unsecured, MSME and export-linked loan segments amid geopolitical uncertainty and macroeconomic risks.
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