Banks may keep gross NPAs in 2.0–2.2% range by FY27; MSME stress seen rising but broad asset quality to stay stable: Crisil

The ratings agency projects a broadly stable asset quality outlook for Indian banks through FY27, with corporate resilience and retail stability offsetting mild MSME stress amid West Asia-led external headwinds.

India’s banking sector is likely to see gross non-performing assets (NPAs) remain broadly range-bound at 2.0–2.2% by March 2027, according to CRISIL Ratings, under a base-case scenario that assumes temporary disruption from geopolitical tensions in West Asia followed by gradual stabilisation.

This compares with an estimated cyclical low of around 2.0% in March 2026, indicating that while asset quality may see a marginal uptick, the overall credit cycle is expected to remain stable rather than deteriorate materially.

Corporate balance sheets anchor stability

The outlook factors in a short-lived impact from the West Asia conflict, which is expected to moderate GDP growth to around 7.1% this fiscal, down from 7.6% last year. Despite this moderation, India Inc’s balance sheets are expected to remain a key stabilising force for the banking system.

The corporate loan segment, which accounts for nearly 36% of total bank credit, is projected to maintain gross NPAs at 1.2–1.3% by March 2027, largely unchanged from current levels. CRISIL notes that strong leverage profiles and improved interest coverage ratios across corporates are expected to cushion the impact of higher input costs, currency volatility and trade-related disruptions.

A sector-level stress assessment covering 30 industries suggests that credit impact remains contained across most sectors, with only a limited set of exposures likely to face meaningful pressure, thereby keeping systemic risk under control.

MSME stress edges up, but policy cushion remains active

The MSME segment is expected to see a mild increase in stress, with gross NPAs projected to rise to 3.4–3.6% this fiscal, compared with around 3.2% last year. CRISIL attributes this to input cost pressures, supply-chain disruptions and seasoning effects following strong credit growth. However, policy interventions, including targeted relief measures and potential credit guarantee support, are expected to limit the extent of deterioration.

Retail stability offsets cyclical risks

Retail asset quality is projected to remain broadly stable, with gross NPAs estimated in the 1.1–1.3% range, supported by consistent performance in secured lending, particularly housing loans, which continue to demonstrate structural resilience.

While unsecured retail lending has shown some volatility, tighter underwriting standards and better-performing newer loan vintages are helping stabilise the segment, even as elevated borrower leverage remains a key watchpoint.

Agriculture credit remains sensitive to monsoon patterns, with below-normal rainfall flagged as a potential risk factor.

Overall, CRISIL expects banking sector asset quality to remain broadly range-bound through FY27, with resilience in corporate and retail portfolios offsetting moderate stress in MSME and cyclical segments.