Rating agency Icra on Wednesday warned that gross non-performing assets (GNPAs) of both public and private sector banks could rise in FY27 if the second-order economic impact of the ongoing West Asia conflict materialises.
In absolute terms, GNPAs of public sector banks are projected to increase from ₹2.6 trillion in December 2025 to ₹3.1 trillion by March 2027. For private sector banks, GNPAs are expected to rise from ₹1.3 trillion to ₹1.7 trillion over the same period.
The GNPA ratio is estimated to edge up to 2.2 per cent for PSU banks and 1.8 per cent for private sector banks by March 2027 compared with 2.1 per cent and 1.6 per cent, respectively, as of December 2025.
According to Sachin Sachdeva, vice-president and sector head, financial sector ratings at Icra, MSME and retail lending drove incremental credit growth in FY26. However, any adverse second-order impact affecting cash flows could lead to asset quality pressures. He noted that slippages, which had been declining, may rise in FY27 under such conditions.
Sachdeva added that private sector banks continue to report relatively higher slippage rates due to greater exposure to unsecured retail and MSME portfolios, although overall asset quality is expected to remain manageable.
Before the escalation of the West Asia conflict in February, the RBI had projected an improvement in asset quality. In its December 2025 Financial Stability Report, it had estimated the GNPA ratio of 46 banks to decline from 2.1 per cent in September 2025 to 1.9 per cent by March 2027.
However, RBI governor Sanjay Malhotra has highlighted concerns over second-round effects stemming from the conflict. He noted that prolonged supply chain disruptions could transform an initial supply shock into sustained inflationary pressures.
Icra also expects credit growth to moderate to below 12 per cent in FY27, down from 15.9 per cent in FY26, amid heightened geopolitical uncertainties and shifting interest rate dynamics.
“Bank credit growth is likely to ease in FY27 following strong expansion in FY26, as the impact of global uncertainties, including the West Asia conflict and elevated crude oil prices, feeds into macroeconomic and financial conditions,” Sachdeva said.
He cautioned that vulnerable sectors such as MSMEs may face the brunt of supply chain disruptions. Deposit mobilisation remains a challenge for banks, and with deposit costs unlikely to decline significantly, net interest margins are expected to stay under pressure.