02 - 09 - 2026

Small Finance Banks’ non-performing assets to fall by 120 bps this fiscal: Crisil

Asset quality at small finance banks (SFBs) is expected to improve this fiscal, with gross non-performing assets (GNPAs) projected to decline by about 120 basis points (bps) to 2.6-2.8 per cent by March 2027.

This is a fall from 3.8 per cent recorded for the fiscal year ended March 2026 and 4.4 per cent for year ended March 2025, according to a Crysil Ratings’ report.

“Tighter underwriting by SFBs has improved borrower selection, materially strengthening the asset quality of microfinance portfolios. As newer vintages originated under the revised guardrails season and account for a larger share of the overall microfinance book, asset quality is expected to improve further, with GNPA declining to 3.8-4 per cent by March 2027 from the peaks of 7.6 per cent and 8.4 per cent seen in fiscals 2026 and 2025, respectively,” Aparna Kirubakaran, director at Crisil Ratings said.

The improvement will be driven by a recovery in the credit performance of the microfinance portfolio, alongside continued growth in, and a rising contribution from, the non-microfinance portfolio, where asset quality is expected to remain stable.

Over the past two fiscals, the microfinance portfolio experienced elevated credit stress owing to borrower overleveraging. As a result, despite accounting for only around 30% of advances, the segment contributed disproportionately to overall delinquencies.

In response, SFBs recalibrated growth, strengthened underwriting practices and tightened risk management standards, including alignment with the microfinance industry’s Guardrails 2.0 framework. They also wrote off advances equivalent to about 7 per cent of the outstanding portfolio as of March 2024, mostly microfinance loans.

Non-microfinance growth provides support

The reduction in overall GNPAs will also be supported by healthy growth in the non-microfinance portfolio, which has exhibited stable asset quality. The portfolio now accounts for around 70 per cent of total SFB advances, up from about 50 per cent in fiscal 2022, and has expanded rapidly in recent years as SFBs diversified towards more secured lending segments.

However, given the relatively limited seasoning of some of these portfolios, their performance across a full credit cycle, particularly in a dynamic macroeconomic environment, remains to be tested.

“GNPAs in the non-microfinance portfolio of SFBs remained stable at 2.2-2.4 per cent in fiscals 2025 and 2026 and are expected to remain within this range this fiscal as well. As these portfolios mature, asset quality across segments such as MSME lending, loans against property and vehicle finance will warrant close monitoring, given their varying sensitivity to macroeconomic factors, including fuel prices, rural income trends and monsoon outcomes. At present, however, these factors are not expected to pose any material risk,” Vani Ojasvi, associate director at Crisil Ratings said.

Overall, SFBs appear to be moving beyond the recent stress cycle, supported by stronger underwriting standards and healthier performance from newer microfinance vintages. Encouragingly, trends in early stress indicators over the past year reinforce this expectation. The aggregate share of special mention accounts (SMA) I and II in gross advances declined to 2.4 per cent as of March 2026 from around 3.4 per cent a year earlier, reflecting improved collection efficiency and a lower build-up of delinquent accounts.