The gross non-performing assets (NPAs) of the micro, small, and medium enterprises (MSME) loan portfolio are projected to rise to around 3.9 per cent by the end of FY26, according to Crisil Ratings. The increase is largely attributed to the recent 50 per cent tariff hikes imposed by the United States on Indian exports, which are expected to strain several export-driven MSME segments.

As of the end of FY25, the MSME loan portfolio—which accounts for nearly 17 per cent of total banking system credit—recorded a gross NPA ratio of 3.59 per cent. Crisil forecasts this to climb to between 3.7 and 3.9 per cent in FY26, primarily due to the negative impact of US tariffs on sub-sectors such as textiles, garments, carpets, gems and jewellery, shrimp and processed seafood, and selected chemical products.

“For the current year, we anticipate NPAs in the MSME segment increasing moderately to 3.7–3.9 per cent. That’s primarily due to the recent, abrupt hikes in tariffs by the US,” said Subha Sri Narayanan, Director, Crisil Ratings.

The agency added that export-oriented MSMEs could face financial strain from higher duties, leading to a slight uptick in system-wide bad loans. Crisil expects total banking sector NPAs to stand at 2.3–2.5 per cent by the end of FY25, compared with 2.3 per cent in the previous fiscal year.

While MSME credit growth remains essential for overall economic expansion, Crisil noted that the rapid lending pace in recent years has heightened the risk of asset quality issues in the coming periods.

In the retail segment, gross NPAs rose to 1.8 per cent as of March 31, 2025, from 1.5 per cent a year earlier. This marginal increase was partly offset by aggressive write-offs, as banks eliminated nearly 50 per cent of their opening NPAs and slippages during the year.

“Even if reported gross NPA stays contained through write-offs, the implications of prolonged higher slippages will surface through elevated credit costs,” said Vani Ojasvi, Associate Director, Crisil Ratings.

Crisil expects total retail non-performing loans (NPLs) to remain stable at about 1.2 per cent, supported by strong home loan performance. Meanwhile, the corporate loan portfolio, which represents about 38 per cent of total banking credit, is expected to maintain NPAs in the range of 1.4–1.5 per cent, aided by solid balance sheets and prudent lending practices.