Fresh bad-loan generation may rise in FY27; private banks face greater pressure: Report

Private banks face higher slippage risk

Ratings agency Icra has said fresh non-performing assets in the banking system are set to rise in FY27, with private sector lenders likely to bear more stress than their public sector peers. The agency expects the trend of higher slippages at private banks to persist through the second half of the fiscal, though credit costs are projected to stay favourable and well below historical averages.

The pressure on private banks is linked to their larger share of unsecured retail and MSME exposures. Icra estimates the fresh NPA generation rate at 2.5 per cent for private banks in FY27, against 0.8 per cent for public sector banks. In absolute terms, fresh bad loans are put at about ₹1.3 lakh crore for private lenders and ₹1 lakh crore for state-owned banks.

Asset quality and profitability outlook

Despite the expected rise in fresh slippages, Icra expects the banking sector to remain profitable, helped by contained credit costs and adequate capital. The gross NPA ratio is projected at 1.7–1.8 per cent by March 2027, compared with 1.7 per cent in June 2026. The net NPA ratio is seen at 0.4–0.5 per cent, against 0.4 per cent in June 2026.

Bank credit growth is forecast at 15.1–15.9 per cent in FY27, implying incremental credit of ₹32.3–33.8 lakh crore. The agency flagged geopolitical risks and inflationary pressures as possible challenges to these estimates, and said sustaining domestic deposit growth after available liquidity is deployed will be a key monitorable in the second half.

Margins, NBFC funding needs

A reversal in the interest-rate cycle could support net interest margins, which had come under pressure during the declining rate phase. Icra expects yields on advances to reprice faster than deposit rates, aiding a margin recovery. Rising bond yields could also shape corporate borrowing decisions and support credit demand, though the durability of the corporate lending pickup depends on whether the gap between bank lendin…