Rising Credit Costs FY26: Unsecured Loans & Microfinance Risk
Banks brace for a potential rise in credit costs in FY26, a shift primarily fueled by increasing stress within unsecured loans and the microfinance sector. CareEdge Ratings highlights this trend, yet emphasizes banks’ strong position, backed by robust provision buffers and high Provision coverage Ratios.Public Sector Banks, in particular, have strategically fortified their reserves, diminishing the need for additional provisions. While private banks show slightly lower coverage, both sectors must vigilantly manage their portfolios. The report underscores how a decline in credit costs might reverse. Explore how banks’ preparedness can definitely help them navigate the evolving landscape of unsecured lending. News Directory 3 provides an insightful analysis of the coming scenarios. Discover what’s next for financial institutions to maintain stability.
Banks Face Potential Credit Cost Increase in FY26
Updated June 15, 2025
A recent report by CareEdge ratings indicates that increasing stress in short-term unsecured loans and microfinance segments could drive up banks’ credit costs in the Financial Year 2026. Despite this potential rise in credit costs, the report notes that banks are generally well-prepared to handle these losses due to robust provision buffers and high provision coverage ratios.
Public Sector Banks (PSBs) have spent the last 18 to 24 months building ample financial reserves to cover potential loan losses. This proactive measure has resulted in a high Provision coverage Ratio (PCR) of approximately 75% to 80%. This means PSBs have already allocated sufficient funds to manage a meaningful portion of their non-performing assets. Consequently, the need for additional provisions decreases, potentially leading to increased profitability if some of these troubled loans are recovered.
Private banks, while having fewer non-performing loans, maintain a slightly lower PCR of around 74%. timely loan repayments have led to reduced losses and improved profits for most banks. As a notable example, credit costs have steadily declined from 0.86% in FY22 to 0.41% in FY25.However, the report suggests this downward trend is unlikely to continue.
While banks possess adequate safety nets, the emergence of stress in unsecured personal loans and microfinance loans is expected to normalize credit costs. This could lead to a slight increase in credit costs during FY26, even tho banks are anticipated to manage the impact effectively.
The report highlights the importance of monitoring asset quality and managing risks associated with unsecured lending to maintain financial stability in the banking sector.The analysis focuses on the impact of unsecured loans on credit costs and the overall financial health of banks.
“Net additions to NPAs have remained broadly low, enabling the sector to witness a steady reduction in headline asset quality numbers. However, with the personal loans segment facing stress, the overall fresh slippages are expected to rise, and recoveries/upgrades are likely to taper gradually,” sanjay Agarwal, Senior Director at CareEdge Ratings, said.
Agarwal added that the SCB GNPA ratio is projected to marginally deteriorate, remaining in the 2.3%-2.4% range by the end of FY26. This is due to increased slippage in specific areas and stress in unsecured personal loans, which would be partially offset by corporate deleveraging and a declining trend in GNPAs.He cautioned that key risks include deteriorating asset quality from elevated interest rates, regulatory changes, and global economic challenges like tariff increases.
What’s next
Looking ahead, banks will need to carefully manage their portfolios, particularly in the unsecured lending space, to mitigate potential risks and maintain healthy financial performance. Monitoring economic conditions and adapting to regulatory changes will also be crucial.