Crisil Projects Decline in Small Finance Banks' GNPAs to 2.8% by March 2027

Asset quality at small finance banks (SFBs) is projected to improve, with gross non-performing assets (GNPAs) expected to decline by about 120 basis points to 2.6-2.8 per cent by March 2027. According to data from Crisil Ratings, overall GNPAs stood at 4.4 per cent as of March 2025 and are estimated at 3.8 per cent as of March 2026.

Over the past two fiscals, the microfinance portfolio faced elevated credit stress driven by borrower overleveraging. Although microfinance accounted for only around 30 per cent of total advances, it contributed disproportionately to overall delinquencies during this period.

In response to these challenges, SFBs recalibrated their growth strategies, strengthened underwriting practices, and tightened risk management standards. These measures included alignment with the microfinance industry's Guardrails 2.0 framework. Crisil Ratings observed that these banks wrote off advances equivalent to 7.0 per cent of the outstanding portfolio as of March 2024, primarily consisting of microfinance loans, which helped reduce GNPAs in the previous fiscal.

Additional measures implemented by the Micro Finance Industry Network (MFIN) include capping total indebtedness per borrower, restricting lending to delinquent borrowers overdue for more than 60 days effective January 1, 2025, and limiting the number of microfinance lenders per borrower effective April 1, 2025.

Aparna Kirubakaran, Director at Crisil Ratings, noted that tighter underwriting by SFBs has improved borrower selection and strengthened microfinance asset quality. As newer loan vintages originate under revised guardrails and account for a larger share of the overall book, microfinance GNPAs are expected to decline to 3.8-4.0 per cent by March 2027, down from peaks of 8.4 per cent in fiscal 2025 and 7.6 per cent in fiscal 2026.

This expected improvement, reflected in lower slippages and higher recoveries alongside steady portfolio growth, supports the normalisation of the microfinance segment. The reduction in overall GNPAs will also be sustained by healthy growth in the non-microfinance portfolio.

The non-microfinance portfolio currently accounts for approximately 70 per cent of total SFB advances, rising from about 50 per cent in fiscal 2022 following a strategic diversification towards secured lending segments. Vani Ojasvi, Associate Director at Crisil Ratings, stated that GNPAs in the non-microfinance portfolio remained stable at 2.2-2.4 per cent in fiscals 2025 and 2026, and are expected to remain within this range.

However, analysts note that the performance of these newer secured portfolios across a full credit cycle and dynamic macroeconomic environment remains to be fully tested. Segments such as MSME lending, loans against property, and vehicle finance will require close monitoring regarding their sensitivity to factors like fuel prices, rural income trends, and monsoon outcomes, though these do not currently pose material risks.

Overall, early stress indicators suggest SFBs are moving past the recent stress cycle. The aggregate share of special mention accounts (SMA) I and II in gross advances declined to 2.4 per cent as of March 2026 from approximately 3.4 per cent a year earlier, reflecting improved collection efficiency and reduced delinquent account formation.

"The projected recovery in asset quality for small finance banks highlights the effectiveness of disciplined risk management and tighter underwriting standards. By recalibrating growth and aligning with stricter industry guardrails, financial institutions can successfully navigate portfolio stress. For entrepreneurs and expanding businesses, this stabilization in the banking sector signals a more predictable credit environment as lenders balance microfinance exposure with secured non-microfinance diversification." — Dr. Shishir Gupta, Founder & CEO, StartupLanes