NPA generation bottomed out in FY26: ICRA

MUMBAI: Banks' fresh non-performing asset (NPA) generation is expected to rise moderately in FY27 as asset quality normalises after a prolonged improvement, while credit growth and profitability remain firm, according to ICRA.Public sector banks' fresh slippages, which fell from Rs 1.8 lakh crore in FY22 to Rs 90,000 crore in FY25 and FY26, are projected to rise to Rs 1 lakh crore in FY27. The gross fresh NPA generation rate is estimated at around 0.8% in FY27, unchanged from FY26.Private sector banks are expected to see fresh slippages rise to Rs 1.3 lakh crore in FY27 from Rs 1.2 lakh crore in FY26. Their annualised fresh NPA generation rate is projected to remain in the 1.6-1.8% range, reflecting their greater exposure to unsecured retail and MSME loans.Despite the expected increase in fresh slippages, overall asset quality is projected to remain stable. Gross NPAs are estimated at 1.7-1.8% of advances and net NPAs at 0.4-0.5% by March 2027.Bank profitability is expected to remain steady, with return on assets projected at 1.27-1.34% in FY27. Credit growth, margin expansion and contained credit costs are expected to support earnings.Bank credit is projected to grow by 15.1-15.9% in FY27, translating into incremental lending of Rs 32.3 lakh crore to Rs 33.8 lakh crore. Retail and MSME lending are expected to support growth, alongside a pickup in corporate credit. Elevated bond yields are making bank loans more attractive to companies than bond market borrowing.Interest rate movements and funding costs will also influence margins. Banks' large share of variable-rate loans allows lending rates to adjust as the interest rate cycle turns, supporting yields on advances.Foreign currency non-resident (FCNR(B)) deposit inflows, supported by the RBI's concessional swap facility, have added liquidity to the banking system. This is expected to support credit expansion and help contain funding costs by reducing banks' reliance on more expensive wholesale deposits.Floating-rate housing loans and other longer-tenure products will also transmit benchmark rate changes to borrowers, helping banks sustain spreads.Credit costs are expected to remain below levels seen during earlier periods of stress. Provisions for public and private sector banks are projected at around 0.4% of advances in FY27, limiting the impact of higher fresh slippages on profits.You use AI every day. Now get your AI Quotient. Take the AIQ test.