RBI FSR: Asset quality improves, funding pressure lingers

The RBI’s commentary on consumer loans is less worrisome in the current report with both NPL ratio and SMA slippages showing declining trends. Analysts see similar trends in performance in microfinance and personal loans. Recent stress was largely income-related, affecting lower-income borrowers more sharply after lenders tightened credit amid rising risk signals

Mumbai: The RBI’s latest Financial Stability Report (FSR) report shows that impairment ratios are in a favorable position. Gross NPLs declined 10 basis points to 2.2 per cent in H1. Slippages at 1.4 per cent and trends on unsecured loans suggest that the worst of the asset quality cycle is behind us.

Return on Equity (RoE) stands at 13 per cent, while Return on Assets (RoA) is comfortable at 1.3 per cent. Whie banks’ balance sheets are strong, credit demand must broaden; otherwise, Net Interest Margins (NIM) could face medium-term pressure, according to a report by Kotak Institutional Equities.

Speaking to Bizz Buzz, Shiva Kumar, former MD of State Bank of Bikaner & Jaipur, said, “No doubt banks are having the best NPL position in years. But the recent trend of loan growth exceeding deposit accretion may create fresh challenges.”

Either the loan growth has to be moderated, which could impact the economy, or NIMs have to be sacrificed affecting profitability. It’s a hard choice. I would suggest a reduction in NIMs in the hope that sustained economic growth will compensate banks in the long run, he said.

Key takeaways from the report include a decline the gross NPL ratio for H1 10 bps to 2.2 per cent for banks, while the net NPL ratio remained stable at 0.5 per cent. Slippages in the period were stable at 0.4 per cent for the public sector banks and 0.9 per cent for private banks.

Stressed loans in the industrial credit book fell to 2 per cent from 23 per cent in FY18. The gross NPL ratio for PSU banks continued to decline to 2.5 per cent, while retail NPLs remained stable at 1.1 per cent. Around 55 per cent of retail slippages are now coming from the unsecured loan portfolio.

Risks in the microfinance segment are also gradually declining, with ratio of stressed assets in the 31-180 DPD bucket declining over the past three quarters. Capital levels remain comfortable to manage growth and near-term stress. Deposit growth, however, remains marginally lower at 10 per cent, compared with loan growth of 11 per cent. RoE at 13 per cent and RoA of 1.2 per cent continue to signal stable performance.

The RBI’s commentary on consumer loans is less worrisome in the current report with both NPL ratio and SMA slippages showing declining trends.

Analysts see similar trends in performance in microfinance and personal loans. Recent stress was largely income-related, affecting lower-income borrowers more sharply after lenders tightened credit amid rising risk signals.

With these pressures easing and portfolio quality improving, analysts expect credit flows to recover, reducing the risk of elevated slippages and credit costs. Lending to tariff-exposed sectors remains steady at 13 per cent of total MSME credit, with textiles accounting the largest share.

Asset quality in these sectors showed higher gross NPL ratios compared with the MSME portfolio, but the SMA ratios remained stable. Banks now enter the coming quarters with significantly de-risked loan portfolios, as the share of high-risk borrowers has fallen materially in recent years. This improved risk profile means should help the system from external shocks and contain slippages.

Loan growth is recovering as banks across segments—public, private (large, mid-tier, regional) and SFBs—gain confidence from stronger balance sheets and actively pursuing expansion. However, deposit mobilization remains a challenge. Current trends suggest credit demand may lag lenders’ ambitions. Sustained, broad-based recovery and comfortable liquidity conditions are essential; otherwise, NIM could face pressure.