Bank credit costs likely to decline in H2FY26, near-term slippages to remain elevated: UBS

It emphasised that monitoring of PAR (Portfolio at Risk) 1-90 trends remains crucial, particularly in states such as West Bengal (WB) and Maharashtra (MH), which together account for approximately 17 per cent of the market share. In these regions, early delinquency trends have remained relatively flat.
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Credit costs for Indian banks are projected to keep declining in the second half of FY25, though short-term asset quality pressures may persist due to elevated loan slippages, according to a recent UBS report.

The analysis suggests that while banks may see a reduction in credit costs during the latter half of FY26, immediate loan slippages—particularly in Q2—are likely to stay high because of substantial forward flows. The report states, “We anticipate a credit cost reduction in H2FY26 but foresee short-term slippages in Q2, primarily driven by high forward flows for banks.”

It underlines the importance of monitoring Portfolio at Risk (PAR 1-90), particularly in West Bengal and Maharashtra, where these states account for nearly 17% of market share. Early delinquency trends in these regions have shown minimal change in recent months.

Non-banking financial companies (NBFCs) demonstrated better delinquency performance compared to banks between June and August 2025. Early delinquencies for NBFCs have declined, although banks continue to experience high conversion rates of loans into non-performing assets (NPAs). The report notes that PAR 1-90 for banks fell by 30bp to 3.8%, while NBFCs saw a sharper drop of 80bp to 3.2%.

The metric PAR 1-30, measuring short-term delinquencies, decreased by 30bp and 20bp for banks and NBFCs respectively. The PAR 31-90 segment remained stable for banks, whereas NBFCs recorded a 60bp decline.

UBS also cautioned that a prolonged economic slowdown could impact financial sector stability, potentially leading to slower credit expansion, higher NPA risks, and squeezed net interest margins (NIMs). Rising deposit costs remain a key concern, with banks likely to see stable or declining margins in the near term.

Published on September 30, 2025