New Delhi: Credit costs in Indian banks are expected to continue their declining trend in the second half of the current financial year (H2FY26), although near-term slippages are likely to remain elevated, according to a report by global financial services firm UBS.
The report noted that while overall credit costs should ease in H2FY26 compared to FY25, asset quality pressures, particularly for banks, are expected to persist due to high forward flows.
UBS stated, “We continue to expect a decline in credit costs in H2FY26 (vs FY25) but near-term slippages (Q2) are likely to remain elevated due to high forward flows, especially for banks.”
The report emphasized the importance of monitoring Portfolio at Risk (PAR) 1–90 trends, especially in states like West Bengal and Maharashtra, which together account for roughly 17% of the market. In these regions, early delinquency trends have remained relatively stable.
Non-banking financial companies (NBFCs), by contrast, have shown improved delinquency trends over the June–August 2025 period. While early delinquency is easing, forward flows to non-performing assets (NPAs) remain high, particularly for banks.
According to the report, PAR 1–90 for banks declined by 30 basis points (bp) to 3.8%, while for NBFCs, it fell by 80bp to 3.2%. For context, PAR is a key financial metric used to assess the credit risk of a lender’s loan portfolio.
Breaking it down further, PAR 1–30 decreased by 30bp for banks and 20bp for NBFCs, while PAR 31–90 remained flat for banks and fell 60bp for NBFCs.
The report also cautioned that, although India’s economic growth is expected to remain healthy, any prolonged slowdown could impact the banking and financial sector. This could result in slower credit growth, higher NPA risk, and pressure on fee income and net interest margins (NIM).
Rising deposit costs could further squeeze margins, with UBS expecting bank margins to remain stable or decline in the near term.
