Banks' Non-Performing Assets Remain Stable Amid Global Uncertainty, Crisil Stress Test Reveals

Mumbai: Banks' Asset Quality to Remain Stable Amid West Asia War Disruptions

Banks' asset quality is expected to remain broadly stable despite disruptions caused by the ongoing West Asia war, according to Crisil Ratings. The agency, which factored in the conflict and its after-effects persisting for three to four months, conducted a stress test across 30 sectors, showing limited impact on most corporate credit profiles.

The stress test, which accounted for 65% of rated corporate debt by Crisil, showed companies in 23 sectors directly or indirectly exposed to the war will see limited impact on credit profiles. Six sectors could see a moderately negative impact, while only one sector, ceramics, is expected to see an adverse impact. These seven sectors account for 7% of rated corporate debt.

Crisil expects gross non-performing assets (NPAs) for banks to remain in check at 2.0-2.2% by the end of March 2027, compared with a historical low of an estimated 2.0% as of March 2026. The corporate segment, which accounted for 36% of India's total bank credit as of March 2026, is expected to see stable gross NPAs of 1.2-1.3% by March 2027, in line with the 1.2% estimate as of March 2026.

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The corporates are insulated from the war impact due to their healthy balance sheets backed by lower debt-to-equity ratios and improvement in interest coverage ratio, according to Crisil. However, loans to the micro, small and medium enterprise (MSME) segment will be hit more due to the war, with a modest increase in reported gross NPAs in the MSME segment, to 3.4-3.6% this fiscal from 3.2% last fiscal.

The MSME segment typically has limited financial muscle to absorb higher input costs, supply-chain disruptions, and working capital elongation resulting from the ongoing West Asia conflict. However, government and regulatory relief measures, including the recently announced relief scheme, will support MSMEs.

On the retail side, Crisil does not expect any material impact on banks' asset quality due to tight underwriting standards and overall caution in the segment since the Reserve Bank of India increased risk weights on personal loans in November 2023. However, against a backdrop of increased borrower indebtedness, the trend in early-bucket delinquencies in the unsecured portfolio of banks does warrant attention.

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