Banks could face an increase in credit costs in Financial Year (FY) 2026, primarily due to emerging pressures in the unsecured lending and microfinance sectors, according to an analysis by CareEdge Ratings. Despite these headwinds, banks are well-equipped to manage potential losses, supported by substantial provision buffers and high provision coverage ratios (PCRs). Public Sector Banks (PSBs), in particular, have built strong financial provisions over the past 18-24 months to guard against loan defaults. With a sustained decline in non-performing assets (NPAs), the need for additional provisioning has reduced, consequently lowering credit costs. PSBs currently maintain a robust PCR in the range of 75 to 80 per cent, reflecting adequate reserves to absorb stressed assets. This lower provisioning requirement could also translate into additional income through recoveries of previously written-off bad debts. Private sector banks, while exhibiting lower levels of NPAs, operate with a slightly lower PCR of around 74 per cent. Improved loan repayment behaviour across the banking sector has further contributed to reduced losses and bolstered overall profitability. According to CareEdge Ratings, quoted by ANI, credit costs have steadily declined from 0.86 per cent in FY22 to 0.47 per cent in FY24, and further to 0.41 per cent in FY25. However, this downward trend is expected to reverse, as new stress emerges in select lending segments. Sanjay Agarwal, Senior Director at CareEdge Ratings said, “Net additions to NPAs have remained broadly low, enabling the sector to witness a steady reduction in headline asset quality numbers. However, with the personal loans segment facing stress, the overall fresh slippages are expected to rise, and recoveries/upgrades are likely to taper gradually.” He added, “The SCB GNPA ratio is projected to marginally deteriorate, albeit remain in the same broad range from 2.3 per cent by FY25-end to 2.3–2.4 per cent by FY26-end due to an increase in slippage in select pockets and stress in unsecured personal loans, which would be offset by corporate deleveraging and a declining trend in the stock of GNPAs. Key downside risks include deteriorating asset quality from elevated interest rates, regulatory changes, and global headwinds such as tariff increases.”
