MSME NPAs set to rise in FY26 on US tariffs; overall banking asset quality remains strong: CRISIL

Non-performing assets (NPAs) in India’s banking sector are expected to stay largely stable in the current fiscal, but could see a moderate uptick for small businesses, particularly those dependent on exports, following steep tariff hikes announced by the US, according to Crisil Ratings.

The ratings agency said gross NPAs across banks are likely to remain controlled at 2.3–2.5% by March 2026, close to the decade-low level of 2.3% recorded at the end of March 2025.

“This fiscal, we see NPAs in the MSME sector increasing moderately to 3.7-3.9%,” said Subha Sri Narayanan, Director, Crisil Ratings. “This is primarily due to the recent, steep hike in tariffs announced by the US, which affects export-oriented MSME sub-segments such as textiles, garments and carpets, gems and jewellery, shrimp and processed seafoods, and certain segments of the chemicals sector.”

The MSME segment, which accounts for about 17% of overall bank credit, has seen steady improvement in recent years. The gross NPAs in the segment declined to 3.6% as of March 2025 from 8.7% in March 2021, aided by government guarantee schemes such as the Emergency Credit Line Guarantee Scheme (ECLGS) and Credit Guarantee Fund for Micro Units (CGFMU).

However, Crisil warned that past periods of rapid MSME credit growth have typically been followed by a rise in delinquencies. The segment has recorded a compound annual growth rate of around 16% over the past three years.

On the other hand, asset quality in the corporate loan book, which forms 38% of total bank credit, is expected to remain steady, supported by strong balance sheets and healthy cash flows.

Crisil estimates gross NPAs in the corporate portfolio at 1.4–1.5% as of March 2026.

Retail loans, which account for roughly a third of bank credit, are also expected to remain stable with gross NPAs at about 1.2%.

However, unsecured retail loans continue to warrant close monitoring despite aggressive write-offs by banks, Crisil said.

“While reported gross NPA may remain controlled due to write-offs, the impact of any continued higher slippages will be seen in credit costs,” said Vani Ojasvi, Associate Director, Crisil Ratings.

Crisil said overall, India’s banking asset quality should be benign even as gross NPA is expected to have bottomed out.