Small Finance Banks’ asset quality set for recovery as GNPAs seen falling to 2.8% by March 2027: Crisil

Gross non performing assets (GNPAs) are projected to decline by about 120 basis points (bps) to 2.6-2.8 per cent by March 2027, from 3.8 per cent and 4. 4 per cent as of March 2026 and March 2025, respectively.

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Asset quality at small finance banks (SFBs) is expected to improve this fiscal, driven by a recovery in the credit performance of the microfinance portfolio, alongside continued growth in, and a rising contribution from, the non-micro finance portfolio, where asset quality is expected to remain stable, according to Crisil Ratings.Gross non performing assets (GNPAs) are projected to decline by about 120 basis points (bps) to 2.6-2.8 per cent by March 2027, from 3.8 per cent and 4. 4 per cent as of March 2026 and March 2025, respectively.The agency noted that over the past two fiscals, the microfinance portfolio experienced elevated credit stress owing to borrower overleveraging.As a result, despite accounting for only around 30% of advances, the segment contributed disproportionately to overall delinquencies.In response, SFBs recalibrated growth, strengthened underwriting practices and tightened risk management standards, including alignment with the microfinance industry’s Guardrails 2.0 framework.Crisil Ratings observed that these Banks also wrote off advances equivalent to 7.0% of the outstanding portfolio as of March 2024, mostly microfinance loans. This helped reduce GNPAs last fiscal.Measures announced by Micro Finance Industry Network (MFIN) for strengthening microfinance lending that includes, among others, cap on total indebtedness per borrower and no lending to delinquent borrowers (overdue for >60 days) effective January 1, 2025 and limit on number of microfinance lenders per borrower, effective April 1, 2025.Tighter underwriting helps microfinance asset quality recoverAparna Kirubakaran, Director, Crisil Ratings, said :”Tighter underwriting by SFBs has improved borrower selection, materially strengthening the asset quality of microfinance portfolios. As newer vintages originated under the revised guardrails season and account for a larger share of the overall microfinance book, asset quality is expected to improve further, with GNPA declining to 3.8-4.0% by March 2027 from the peaks of 7.6% and 8.4% seen in fiscals 2026 and 2025, respectively.”This improvement, reflected in lower slippages and higher recoveries and supported by steady portfolio growth, is expected to drive the normalisation of asset quality in the microfinance segment.The reduction in overall GNPAs will also be supported by healthy growth in the non-microfinance portfolio, which has exhibited stable asset quality.The portfolio now accounts for around 70% of total SFB advances, up from about 50% in fiscal 2022, and has expanded rapidly in recent years as SFBs diversified towards more secured lending segments.However, given the relatively limited seasoning of some of these portfolios, their performance across a full credit cycle, particularly in a dynamic macroeconomic environment, remains to be tested.‘Non-microfinance portfolio remains stable’Vani Ojasvi, Associate Director, Crisil Ratings, said: “GNPAs in the non-microfinance portfolio of SFBs remained stable at 2.2-2.4% in fiscals 2025 and 2026 and are expected to remain within this range this fiscal as well .As these portfolios mature, asset quality across segments such as MSME lending, loans against property and vehicle finance will warrant close monitoring, given their varying sensitivity to macroeconomic factors, including fuel prices, rural income trends and monsoon outcomes. At present, however, these factors are not expected to pose any material risk.”Overall, SFBs appear to be moving beyond the recent stress cycle, supported by stronger underwriting standards and healthier performance from newer microfinance vintages.Encouragingly, trends in early stress indicators over the past year reinforce this expectation. The aggregate share of special mention accounts (SMA) I and II in gross advances declined to 2.4% as of March 2026 from around 3.4% a year earlier, reflecting improved collection efficiency and a lower build-up of delinquent accounts.While near-term credit quality trends are expected to remain favourable, the sector’s ability to sustain this recovery as the loan book mix evolves and newer portfolios mature will bear close watching.Published on September 2, 2026