Asset quality is holding up in the micro, small, and medium enterprises (MSME) segment, but there are nascent signs of stress visible in micro enterprises, and the retail loan segment needs close monitoring, the Reserve Bank of India’s Financial Stability Report has noted.“In the MSME segment, while some nascent stress is visible in micro enterprises, the overall gross NPA ratio has shown improvement,” the report said, stressing that overall asset quality remains benign amid above-average loan growth in the MSME and retail segments.Household debt continued to rise, reaching 45.5 per cent of gross domestic product (GDP) at the end of September 2025.The increase was driven mainly by non-housing retail loans, which accounted for 58.4 per cent of total household borrowings as of March 2026. Borrowings for consumption purposes constituted nearly half of household debt, followed by loans for productive purposes, while loans for asset creation grew at a slower pace.Although gross NPA ratios in secured and unsecured retail loans were at 0.7 per cent and 1.7 per cent, respectively, as of end-March 2026, the report said exposure to these sectors requires close monitoring as risks to asset quality could increase, especially if overall economic conditions weaken due to the West Asia conflict and impact borrower cash flows.
Funding is emerging as a crucial challenge for banks, the RBI reckoned, as lenders’ liability profile shifts from low-cost current and savings account (CASA) deposits to higher-cost term deposits and certificates of deposit (CDs), increasing the marginal cost of funds. “Even as the banking system’s resilience remains intact, funding is emerging as a key challenge,” the report said.
The relationship between CASA deposits and interest rates has weakened, compared with previous rate cycles, reflecting a shift in household savings towards higher-yielding investment avenues. As a result, banks' deposit franchise is coming under pressure, which could affect profitability as competition for household savings intensifies despite sustained credit demand.RBI observed that banks are expanding credit to higher yielding segments, such as micro, small, and medium enterprises (MSME) and retail, which is helping safeguard their margins. “Banks that meaningfully increased their MSME and retail lending experienced relatively muted pressure on net interest margins, even as CASA shares declined.”The report also noted that banks have been drawing down excess statutory liquidity ratio (SLR) investments to support credit growth, leading to a decline in liquidity coverage ratio (LCR) buffers. However, recent measures by the RBI and the Centre to attract capital flows are expected to ease funding pressures by improving banks’ access to lower-cost rupee liquidity.The report also pointed to a change in banks' housing loan portfolios, with the share of loans of Rs 50 lakh and above, increasing to 44.7 per cent of outstanding housing credit as of March 2026, from a portfolio previously dominated by loans below Rs 25 lakh. Despite the shift towards larger-ticket loans, asset quality remained stable, with the gross non-performing asset ratio in housing loans declining to 0.5 per cent in March 2026 from 1.2 per cent in March 2019.
-Business Standard 01st July,2026
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