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Mumbai: Asset quality in India's banking system has improved further, latest central bank data showed, with fewer bad loans piling up across borrower categories. This suggests the post-pandemic and rate-cycle-induced stress may have ebbed, although unsecured retail lending remains a cause for concern.
The ratio of special mention accounts overdue by 61-90 days (SMA-2) declined to 0.8% as of end-September 2025, Reserve Bank of India (RBI) data showed. Gross non-performing assets (GNPAs) have fallen to a decadal low of 2.1%. In the MSME sector, the SMA ratio eased to 5.1%, while stress in unsecured loans also moderated sharply, with the SMA-2 ratio falling to 13% from more than 20% a year earlier.
"Asset quality remains broadly stable across banks, with slippages moderating and collection efficiencies improving through the second quarter and into the third quarter of FY26," JM Financial said. "Credit costs for the system are expected to be around 0.6% in the December quarter, broadly stable compared with 2Q."
Data for end-September 2025 showed that the SMA ratio in the MSME sector remained steady at 5.1%, while stress in sectors exposed to US tariffs was relatively contained, with an SMA ratio of 4.8%.
Fresh stress formation among large borrowers has also improved. The SMA-2 ratio for this segment declined nearly 36% in September 2025, reversing a sharp rise of about 67% seen a year earlier when the ratio stood at 0.4%, although absolute SMA figures were not disclosed for the latest period.
Motilal Oswal noted that early indicators point to a gradual easing of stress after a prolonged period of pressure.
'Pockets of Stress'
"Lenders are reporting improvements in monthly collection efficiencies in the microfinance segment. However, select pockets such as micro-LAP, commercial vehicles and affordable housing continue to exhibit stress and warrant close mo
nitoring," the brokerage said. It added that while private and public sector banks are expected to report contained credit costs, select mid-sized private lenders with higher exposure to unsecured and MFI portfolios should see improving credit costs as stress abates.
In gold loans, 69% of disbursements were to prime-and-above borrowers, while 69.1% went to highly rated customers. In consumer loans, private sector banks disbursed over 70% of loans to prime-and-above borrowers.
The ratio of special mention accounts overdue by 61-90 days (SMA-2) declined to 0.8% as of end-September 2025, Reserve Bank of India (RBI) data showed. Gross non-performing assets (GNPAs) have fallen to a decadal low of 2.1%. In the MSME sector, the SMA ratio eased to 5.1%, while stress in unsecured loans also moderated sharply, with the SMA-2 ratio falling to 13% from more than 20% a year earlier.
"Asset quality remains broadly stable across banks, with slippages moderating and collection efficiencies improving through the second quarter and into the third quarter of FY26," JM Financial said. "Credit costs for the system are expected to be around 0.6% in the December quarter, broadly stable compared with 2Q."
Data for end-September 2025 showed that the SMA ratio in the MSME sector remained steady at 5.1%, while stress in sectors exposed to US tariffs was relatively contained, with an SMA ratio of 4.8%.
Fresh stress formation among large borrowers has also improved. The SMA-2 ratio for this segment declined nearly 36% in September 2025, reversing a sharp rise of about 67% seen a year earlier when the ratio stood at 0.4%, although absolute SMA figures were not disclosed for the latest period.
Motilal Oswal noted that early indicators point to a gradual easing of stress after a prolonged period of pressure.
'Pockets of Stress'
"Lenders are reporting improvements in monthly collection efficiencies in the microfinance segment. However, select pockets such as micro-LAP, commercial vehicles and affordable housing continue to exhibit stress and warrant close mo
nitoring," the brokerage said. It added that while private and public sector banks are expected to report contained credit costs, select mid-sized private lenders with higher exposure to unsecured and MFI portfolios should see improving credit costs as stress abates.
In gold loans, 69% of disbursements were to prime-and-above borrowers, while 69.1% went to highly rated customers. In consumer loans, private sector banks disbursed over 70% of loans to prime-and-above borrowers.
