Credit Costs
CareEdge sees credit costs rising in FY26 as stress builds in retail loans
This story was originally published at 15:40 IST on 13 June 2025
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MUMBAI – Banks may face higher credit costs in 2025-26 (Apr-Mar) as stress builds up in unsecured personal loans and the microfinance segment, CareEdge Ratings said in a research report Friday. Despite maintaining healthy provision buffers, banks are likely to see increased slippages, especially in shorter-tenure unsecured loans, it said.
CareEdge said that though the banking system remains broadly stable, asset quality pressure is emerging in certain retail pockets. It expects the gross non-performing asset ratio of scheduled commercial banks to rise slightly to 2.3–2.4% by March from 2.3% a year earlier. The rating agency said corporate deleveraging and a steady decline in legacy bad loans would partly offset the rise in slippages.
Meanwhile, retail NPAs continue to rise, driven mainly by unsecured personal loans, education loans, and credit card dues, the rating agency said. CareEdge noted that banks have increasingly shifted towards retail lending, supported by easier access to personal credit and a decline in corporate borrowing due to deleveraging and alternative funding options. This shift has increased exposure to riskier borrowers.
According to CareEdge, retail asset quality improved after the COVID pandemic, but stress is now rising in unsecured retail segments and the rating agency now expects this trend to become more visible by the first half of FY26.
The rating agency also noted that so far, net additions to bad loans have remained low, allowing banks to improve their overall asset quality numbers. But it warned that this trend may reverse soon and fresh slippages could rise with growing stress in unsecured personal loans and microfinance. At the same time, recoveries and upgrades are likely to slow, reducing the support they provide against new non-performing assets, the rating agency said.
"Net additions to NPAs have remained broadly low, enabling the sector to witness a steady reduction in headline asset quality numbers," said Sanjay Agarwal, senior director at CareEdge. "However, with the personal loans segment facing stress, overall fresh slippages are expected to rise, and recoveries/upgrades are likely to taper gradually." According to Agarwal, the stress in retail loans will be partly offset by corporate deleveraging and a steady drop in the stock of existing gross NPAs.
CareEdge also flagged key downside risks to asset quality. These include the impact of elevated interest rates, potential regulatory tightening, and global headwinds such as tariff hikes and trade disruptions. While banks remain well capitalised, their rising exposure to unsecured and sub-prime retail loans could test their ability to maintain stable asset quality in the coming quarters. End
Reported by Sachi Pandey
Edited by Ashish Shirke
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