Bank loan default cases are likely to increase in the current financial year. Private banks may be under relatively greater pressure due to the risks of unsecured retail loans and loans allocated to micro, small and medium enterprises (MSMEs). This has been speculated in a report released on Tuesday. According to a report by rating agency ICRA, the relatively high rate of conversion of loans into NPAs in private banks may continue in the second half of FY 2026-27. However, loan loss expenses are expected to remain favorable and below historical levels.

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The rating agency estimates that the rate of creation of new NPAs could be 0.8 per cent for public sector banks and 2.5 per cent for private banks in FY 2026-27. In terms of amount, new NPAs of public sector banks in the current financial year could be Rs 1 lakh crore, while private banks’ loans are estimated at Rs 1.3 lakh crore. According to ICRA, the number of loan defaults of private banks is higher in the last two years because of the higher share of unsecured retail and MSME loans in their total loans. Despite fears of rising new bad loans, the rating agency expects banking sector profits to remain strong, supported by favorable credit costs and adequate capital.

Gross NPA ratio may increase

ICRA has estimated that the gross NPA ratio may increase to 1.7-1.8 per cent by March 2027, from 1.7 per cent in June 2026. The net NPA ratio may remain at 0.4-0.5 per cent, compared to 0.4 per cent in June 2026. The rating agency expects bank credit growth to be 15.1-15.9 percent in FY 2026-27. Due to this, an additional loan of Rs 32.3-33.8 lakh crore may be disbursed. Bank credit growth was 15.9 percent in FY 2025-26. However, ICRA said geopolitical risks and inflationary pressures could pose challenges to its growth projections. Sustaining strong growth in domestic deposits after using available cash will also be important for banks in the second half of the fiscal year.

Banks’ interest margins may improve

Changes in the interest rate cycle can support banks’ net interest margins. According to the agency, interest rates on loans can change more quickly than interest rates on bank deposits, thereby improving banks’ interest margins. ICRA, in a separate estimate, said assets under management of non-banking financial companies (NBFCs) could grow by 15-17 per cent in FY 2026-27 and 14-16 per cent in FY 2027-28. However, the borrowing costs of NBFCs are likely to increase. Their average cost of funds may increase by 0.10-0.20 per cent in FY 2026-27. NBFCs and housing finance companies will receive an additional Rs. 6.9-7.1 lakh crore will be required.