Small biz NPAs set to rise in FY26 on US tariffs: Crisil

Mumbai, Oct 6 (PTI) Gross non-performing assets for the banking system's micro, small and medium enterprises portfolio are likely to rise moderately to about 3.9 per cent by FY26-end, a domestic rating agency said on Monday.

The rise in the dud assets will be primarily driven by the impact of the 50 per cent tariffs slapped by the US on Indian exports entering the world's largest economy, Crisil Ratings said.

It can be noted that the overall NPAs from the sector, constituting 17 per cent of the outstanding loans for the banking system, stood at 3.59 per cent at the end of FY25.

"This fiscal, we see NPAs in the MSME sector increasing moderately to 3.7-3.9 per cent. This is primarily due to the recent, steep hike in tariffs announced by the US," the agency's director Subha Sri Narayanan said.

The tariffs will affect export-oriented MSMEs in sub-segments, such as textiles, garments and carpets, gems and jewellery, shrimp and processed seafoods and certain verticals of the chemicals sector, Narayanan added.

Amid calls for pushing credit to small businesses to help drive economic growth, the agency warned that the same may come with associated risks.

"It is pertinent to note that in the past, periods of rapid MSME growth have inevitably led to higher NPAs in the later years," it pointed out.

The tariff-impacted MSMEs will also push up the overall bank NPAs by a notch, the agency said, estimating the system-level dud assets to reach 2.3-2.5 per cent by the end of FY25 from 2.3 per cent at the end of the previous fiscal.

The agency also flagged the unsecured segment in the retail loan books as something to watch out for from an asset quality perspective.

"While reported gross NPA may remain controlled due to write-offs, the impact of any continued higher slippages will be seen in credit costs," its associate director Vani Ojasvi said.

The agency said banks have adopted an aggressive write-off policy in this sub-segment.

While slippages were elevated during the fiscal (more than 2 times the opening gross NPA), high write-offs (50 per cent of opening gross NPA + slippages) resulted in only a modest uptick in gross NPAs to 1.8 per cent as of March 31, 2025, from 1.5 per cent a year earlier.

The overall retail NPAs will remain at 1.2 per cent, the agency's associate director Vani Ojasvi said, attributing this to the steady performance of the housing sector loans.

In the corporate sector, which accounts for 38 per cent of the outstanding loans, the NPAs will remain steady at 1.4-1.5 per cent, given the strong balance sheets, the agency said. PTI AA BAL BAL