Small finance banks' asset quality to improve, GNPA to fall by March 2027: Crisil Ratings

Kolkata: Small finance banks are likely to see their asset quality improve this fiscal, with their gross non-performing assets projected to decline by about 120 basis points to 2.6-2.8% by March 2027, Crisil Ratings said.

Their GNPA stood at 3.8% and 4.4% as of March 2026 and March 2025 respectively.

Crisil said that the improvement would be driven by a recovery in the credit performance of the microfinance portfolio, alongside continued growth in, and a rising contribution from the non-microfinance portfolio, where asset quality is expected to remain stable.


Also read: Bank credit to industry rises 20 percent in July: RBI data

"Tighter underwriting by SFBs has improved borrower selection, materially strengthening the asset quality of microfinance portfolios," Crisil Ratings director Aparna Kirubakaran said.

Granularly, the gross NPA from their microfinance book is likely to ease to 3.8-4.0% by March 2027 from the peaks of 7.6% and 8.4% seen at the end of March 2026 and March 2025 respectively.

The microfinance portfolio experienced elevated credit stress in the past two fiscals, owing to borrower overleveraging. As a result, despite accounting for only around 30% of advances, the segment contributed disproportionately to overall delinquencies, Crisil said.

SFBs' non-microfinance portfolio now accounts for around 70% of total advances, up from about 50% in fiscal 2022.

"SFBs recalibrated growth, strengthened underwriting practices and tightened risk management standards, including alignment with the microfinance industry's guardrails framework," Crisil said.

These banks started to report lower slippages and higher recoveries. These along with steady portfolio growth is expected to drive the normalisation of asset quality in the microfinance segment.