Indian banks’ NPAs: CRISIL sees 2-2.2% in FY27

Conflict backdrop and why banks are being watched

Nearly two months into the West Asia conflict, CRISIL expects Indian banks’ credit portfolios to remain broadly resilient through FY27, even as global markets face higher volatility. The rating agency’s central argument is that corporate balance sheets remain healthy enough to support asset quality. It also expects the retail book to stay manageable, helped by stability in secured segments and a recent stabilisation in unsecured lending performance. The segment that could see visible strain, according to CRISIL, is micro, small and medium enterprises (MSMEs), where borrowers have less flexibility to absorb cost and supply shocks.

CRISIL’s base-case view on system-level GNPA

CRISIL said gross non-performing assets (GNPAs) for domestic lenders could settle at 2-2.2% in FY27, compared with 2% as of March 2026. It linked the expected stability to “healthy balance sheets of India Inc”, which it believes will support credit quality in corporate lending. Separately, CRISIL also highlighted the longer decline in stressed assets, noting that bank GNPAs have fallen from around 11% in FY18 to 2.3% in FY25, and are expected to moderate further to about 2% in FY26.

Corporate book: stable GNPA despite operating stress drivers

For corporate loans, CRISIL expects GNPAs of 1.2-1.3% by March 2027, broadly in line with an estimated 1.2% as of March 2026. Corporate loans accounted for nearly 36% of bank credit as of March 2026, making this stability important for the system-wide outcome. CRISIL noted that corporates could still face pressure on revenues and operating profits due to factors including a gas supply shock, crude oil-linked price increases, direct trade exposure, and rupee depreciation. Even with these pressures, it expects corporate asset quality to hold up, anchored by balance sheet health.

MSMEs: higher vulnerability and a modest GNPA uptick

CRISIL flagged MSME loans as the key pocket to monitor. The MSME segment accounted for about 19% of bank credit, and in the base case, CRISIL expects segment GNPAs to rise modestly to 3.4-3.6% in FY27 from around 3.2% in FY26. It attributed this to two drivers: the conflict’s impact on underlying borrowers and the “seasoning” of a portfolio that has expanded rapidly. CRISIL noted MSME credit has grown at a compound annual rate of around 20% over the past three fiscals.

Government and regulatory measures: RELIEF framework in focus

CRISIL said the impact on MSMEs is expected to be contained through government measures. It referenced the recently announced RELIEF (Resilience & Logistics Intervention for Export Facilitation) framework as a support mechanism for the segment. It also pointed to the possibility of additional measures such as credit guarantee schemes for affected sectors, similar to those used during the Covid-19 period, as potential cushions for asset quality. CRISIL’s note framed these measures as important to preventing stress from cascading into wider bank NPAs.

Retail loans: stable outlook with unsecured book stabilising

For the retail portfolio, which accounted for about 33% of bank credit as of March 2026, CRISIL expects GNPAs to remain stable at 1.1-1.3% in FY27. It expects this resilience to be supported by steady asset quality in secured segments and some stabilisation in the unsecured book compared with recent trends. While the broader environment has become riskier, CRISIL’s retail assessment suggests no broad-based deterioration is being built into its base case.

Financial conditions tightened sharply in March: CRISIL’s macro lens

Alongside the bank portfolio view, CRISIL’s macro report flagged a clear tightening in financial conditions during March. Its Financial Conditions Index (FCI) fell to -1.5 in March from 0 in February, breaching its comfort band for the first time since May 2022 and marking its lowest level since the Covid outbreak. CRISIL noted the stress has been sustained, with the index negative for 10 of the past 12 months. It linked the tightening to a chain reaction driven by the West Asia war: crude oil gains, increased risk aversion, foreign capital outflows, weaker rupee and higher bond yields.

What moved markets: FPIs, equities, currency, and yields

CRISIL cited foreign portfolio outflows as a key transmission channel. FPIs recorded net outflows of $13.6 billion in March, reversing a $1.2 billion inflow in February. This took total FPI flows in fiscal 2026 to a net outflow of $16.6 billion, versus an inflow of $1.7 billion the previous year. Equity markets also weakened: the Sensex fell 8.4% in March, while the NSE VIX rose to 22.1 from 13.0, the highest since May 2022. The rupee depreciated 2.2% on average in March to an average 92.8 per dollar, touching 94.7 by month-end.

Rates and liquidity: RBI actions and money market tightening

Debt markets reflected the risk-off mood. The 10-year government security yield moved above 7% for the first time since July 2024, ending March at 7.02%, up 36 basis points. CRISIL said systemic liquidity remained in surplus but the cushion narrowed, with the RBI absorbing liquidity equivalent to 0.6% of net demand and time liabilities (NDTL) in March versus 0.9% in February. It also noted the RBI conducted open market operations of Rs 1.8 lakh crore to prevent sharper tightening. Money market rates firmed, with the weighted average call money rate rising to 5.2%, while six-month commercial paper rose to 7.68% and certificates of deposit to 7.27%.

Credit growth stayed resilient despite the tightening

CRISIL’s macro report highlighted a divergence: tighter financial conditions alongside steady credit growth. Bank credit growth was 13.8% year-on-year as of mid-March, supported by services credit growth of 16.3% and personal loans of 15.2%. Lending rates stayed relatively benign in the data cited, with housing loans at 8.35% and auto loans at 8.95%, both below pre-pandemic levels. This combination suggests financial markets absorbed the immediate shock faster than the real economy indicators reflected it, even as risks remained elevated.

Key numbers at a glance

Market impact and why these indicators matter

For investors and bank-watchers, CRISIL’s message is mixed but measurable. On one hand, the base-case GNPA trajectory remains low by historical standards, with corporate and retail books projected to stay stable. On the other, the MSME segment is where higher input costs, supply-chain disruption, and elongated working capital cycles can translate into higher delinquencies, especially after a period of fast portfolio growth. The macro backdrop adds another layer: large FPI outflows, a weaker rupee, higher yields, and higher short-term borrowing costs can raise funding stress and compress risk appetite even if on-book asset quality remains contained.

Analysis: resilience with a clear MSME watchlist

The data points in CRISIL’s notes suggest the banking system is entering FY27 with stronger starting conditions than earlier stress cycles, particularly given the fall in GNPAs since FY18. But the same notes also show how quickly external shocks transmit through capital flows, FX, and rates. That makes the MSME and select unsecured pockets the most sensitive areas, because smaller borrowers have less buffer if costs rise or cash flows slow. The role of policy support is also explicit in the outlook: CRISIL expects government measures, including RELIEF and potentially more targeted tools, to limit spillovers.

Conclusion

CRISIL expects Indian banks’ credit portfolios to remain resilient in FY27, with system GNPAs seen at 2-2.2%, supported by stable corporate and retail asset quality. It continues to flag MSMEs as the segment most exposed to the West Asia conflict’s second-order effects, even as policy measures are expected to contain stress. Separately, CRISIL’s macro indicators show that March saw broad-based tightening in financial conditions across equities, currency, debt markets and money markets. The next set of signals to track will be how external volatility evolves and how effectively support frameworks such as RELIEF limit stress in MSME borrowers.