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Small Banks' Asset Quality Set for Major Jump
3 Sep
Summary
- Gross NPAs to decline by 120 basis points by March 2027.
- Microfinance portfolio recovery is driving asset quality improvement.
- Tighter underwriting practices have strengthened borrower selection.
Small finance banks are poised for a notable improvement in asset quality in the current financial year. Projections indicate a significant decrease in gross non-performing assets (GNPAs), with an anticipated reduction of about 120 basis points, bringing them to an estimated 2.6-2.8% by March 2027. This positive trend follows GNPAs of 3.8% and 4.4% at the end of March in the preceding two years.
The anticipated enhancement in asset quality is largely attributed to the robust recovery observed in the microfinance portfolio. Concurrently, the non-microfinance portfolio is expected to maintain stable asset quality while continuing its growth trajectory, increasing its overall contribution.
Experts highlight that small finance banks have implemented tighter underwriting practices, leading to improved borrower selection within their microfinance portfolios. This strategic shift has materially strengthened their asset quality, a crucial development after periods where borrower over-indebtedness caused considerable credit stress in these books.
