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Informist, Wednesday, Apr. 22, 2026

MUMBAI – Global uncertainty, geopolitical conflicts, rising prices, and supply chain constraints may lead to asset quality challenges for the Indian banking sector in the financial year 2026-27 (Apr-Mar), ICRA Ltd. said Wednesday. The rating agency expects slippage to rise in banks' retail loan segment in the current financial year.

Over the last year, a lot of credit growth for banks has come from the micro, small, and medium enterprises and retail segment, ICRA said. If MSMEs are impacted because of the geopolitical turmoil, it may lead to pressure on asset quality for the banks, and the second order impact could be on the retail and unsecured segment, including microfinance and credit cards, ICRA said in its webinar on "Banking Outlook: Growth and Profitability in an Uncertain Geopolitical Environment".

Consequently, ICRA has estimated that "currently there will be some rise in the slippage rate in FY27." The war in West Asia poses challenges for sectors with downside risks for airlines, basmati rice, ceramic tiles, cut-and-polished diamonds, fertilisers, and other sectors, according to ICRA.

ICRA said that the absolute stock of gross non-performing assets would start rising, which so far has been coming down. Indian banks' gross non-performing asset ratio was at a multi-decadal low of 2.15% as of September, according to the Reserve Bank of India's latest Financial Stability Report. Going ahead, the risk to asset quality may also increase credit costs for banks, ICRA said. 

The rating agency also said that in the June quarter of FY26, gilt rates came down and there were a significant quantum of bond issues in that quarter. This led to a limited credit growth of banks. But after the June quarter, yields have been rising. In March, due to the war, there was a jump in the yield.

"So a significant quantum of bond demand probably got shifted to bank credit. This is reflected in a very high level of credit growth jump in Q4 (Jan-Mar) as well," ICRA said. To meet this rise in credit demand, banks will have to raise deposits, ICRA said, while adding that deposit mobilisation has been a challenge for banks over the last one or two years. Indian banks need to recalibrate their strategy to garner deposits, the agency said.

Credit growth is likely to remain healthy in FY27 but lower than FY26, said ICRA, while assigning a stable outlook for the banking sector in FY27. And while ICRA is not expecting a rate hike in the June policy, it has not ruled out the possibility of a rate hike in the subsequent policies or in the latter part of FY27. 

ICRA sees India's GDP growing 6.5% in FY27, assuming the crude oil price around $85 per barrel, which was around $71.7 per barrel in FY26. At the same time, the rating agency has flagged the possibility of downside risks to the projection due to the war.  End

Reported by Suryash Kumar

Edited by Akul Nishant Akhoury

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