Private sector banks face higher bad-loan pressure as unsecured lending grows, says Icra report

Fresh bad loans in India's banking sector are set to rise during the current fiscal year. Private sector banks will face greater pressure from this trend because of their exposure to unsecured retail loans and micro, small and medium enterprise loans. Ratings agency Icra states that private banks will see higher loan slippages continue into the second half of financial year 2027. Credit costs are still projected to stay favourable and significantly below past levels. Icra estimates the fresh bad-loan generation rate at 0.8 per cent for public sector banks in fiscal year 2027, while private sector banks are estimated at 2.5 per cent. In absolute numbers, this equals ₹1 lakh crore for state-owned banks and ₹1.3 lakh crore for private banks. The higher slippages at private banks over the past two years come directly from their larger share of unsecured retail and MSME loans. Despite this rise in fresh bad loans, the banking sector will maintain healthy profits due to good credit costs and enough capital. Icra projects the overall gross non-performing assets ratio at 1.7 to 1.8 per cent by March 2027, up slightly from 1.7 per cent in June 2026. The net non-performing assets ratio should stay at 0.4 to 0.5 per cent compared with 0.4 per cent in June 2026. Bank credit growth will remain healthy at 15.1 to 15.9 per cent in fiscal year 2027, which brings in extra credit of ₹32.3 to 33.8 lakh crore. Credit growth was 15.9 per cent in fiscal year 2026. Global risks and inflation might still cause challenges for these growth numbers. Banks must also manage to keep domestic deposit growth healthy after using up available money. Changes in the interest rate cycle could help banks improve their net interest margins after past pressure. Yields on loans will reprice faster than deposit rates, which supports this margin recovery. Rising bond yields may also change how companies borrow and help drive bank credit demand. Non-banking financial companies will keep growing in double digits. Their assets under management are projected to grow by 15 to 17 per cent in fiscal year 2027 and 14 to 16 per cent in fiscal year 2028. Borrowing costs will go up, with the cost of existing debt rising by up to 0.30 per cent and average fund costs increasing by 0.10 to 0.20 per cent. NBFCs and housing finance companies together need extra funding of ₹6.9 to 7.1 lakh crore in fiscal year 2027 to support growth and refinance old debts.

Context

Loan slippages happen when standard bank loans turn into bad loans because borrowers stop making timely repayments. Unsecured loans lack any physical asset or collateral as backup, which makes them riskier for lenders during financial stress compared to secured loans like home or auto loans.