Private banks are expected to generate bad loans at a significantly faster pace than their public sector counterparts in FY27, according to rating agency ICRA. Fresh NPA generation at private banks is estimated to rise to 2.0% in FY27 from 1.8% in FY26—against 1.2% for public sector banks, up from 0.9% in FY26. This divergence reflects private banks' higher exposure to unsecured retail and MSME advances, which have been the primary source of stress across the sector.
The stress is increasingly concentrated in the MSME and retail segments, with the rural economy seen as bearing the brunt, as reported by ICRA. The ongoing West Asia conflict adds a further layer of uncertainty, with potential job losses—particularly in the IT sector—flagged as a watch item for personal loan performance. This geopolitical tension is creating additional pressure on the banking sector's exposure to these vulnerable segments.
Despite broader sectoral challenges, individual banking institutions are demonstrating remarkable resilience. AU Small Finance Bank reported strong deposit growth of 22.8% year-on-year to approximately ₹1.5 lakh crore, with CASA deposits increasing nearly 19.6% and advances rising about 25% to ₹1.3 lakh crore. Similarly, RBL Bank showed positive momentum with total business growing 24% year-on-year to ₹2.5 lakh crore and advances increasing 22%. This growth is supported by improved governance, balanced growth strategies, and enhanced management focus across both institutions.
The divergence in NPA growth rates between private and public sector banks highlights the different risk profiles of these institutions. Private banks' higher exposure to unsecured lending, particularly in retail and MSME segments, positions them more vulnerably to economic stress and sector-specific challenges. However, the strong performance of institutions like AU Small Finance Bank and RBL Bank demonstrates that effective risk management and strategic focus can help navigate challenging market conditions, with strong deposit growth indicating customer trust and stable funding being key factors for long-term success.
