MUMBAI: The second quarter of the current fiscal was all for the public sector lenders—the traditional laggards on all key metrics-- with their robust recoveries and upgrades, lower fresh slippages coupled with higher write-offs and sales to ARCs, their gross bad loans hitting a decadal low of 2.1 percent from 2.6 percent a year ago, and net bad loans falling to 0.50% from 0.6 percent. In comparison, NNPAs stood at 6% in March 2018.
In absolute terms, system-wide GNPAs declined 11.1 percent on-year to Rs 4.05 trillion and NNPAs fell 9.9 percent on-year to Rs 0.88 trillion.
On the other hand, private sector lenders—which traditionally lead the asset quality and margins charts— had deep red lines all through the key metrics—asset quality, fresh slippages, credit cost, margins and credit and deposit growth in the reporting period.
And the overall asset quality improvement will lead into the second half of the current fiscal with GNPAs falling to 2.3–2.4 percent range as robust recoveries continue and fresh slippages remain contained, says a Care Ratings report Thursday.
However, banks need to be watchful of the rising stress levels in unsecured retail loans along with micro finance loans, though both of which will be taken care to a large extent of by the continuing deleveraging by large corporates, the report added.
Meanwhile credit offtake grew 11.7 percent on-year in Q2, outpacing deposit accretion of 9.7% and some pickup in both is anticipated in the second half yet overall credit growth is expected to remain moderate.
“The multi-year high clean-up of stressed assets, backed by regulatory reforms strengthening creditor rights, have reinforced the banking system’s stability. Credit costs appear to have peaked, remaining stable to lower for public sector banks due to improved asset quality, while private players saw higher provisions but benefited from lower slippages and steady recoveries.
“However, risks remain as continued weakness in low-ticket unsecured loans, potential spillovers from US tariffs, softening global growth, and evolving regulatory interventions can weigh on both credit growth and asset quality in the coming quarters,” the report added.
Sequentially, banks too GNPAs and NNPAs declined by 4.2% and 5.1%, respectively, driven by lower incremental slippages along with recoveries and upgrades, and increased NPA resolutions through ARC sales.
While private sector banks saw a 2.6% increase in gross bad loans to Rs 1.26 trillion due to higher slippages and pressure in the microfinance books, state-run lenders saw a 16.3% on-year decline in the GNPAs to Rs 2.74 trillion.
With the legacy stressed asset pool largely reduced and incremental recoveries moderated, total write-offs and recoveries declined 24.6% to Rs 0.25 trillion while fresh slippage eased by 22.5% to Rs 0.19 trillion, indicating improving portfolio quality.
Private banks’ fresh slippages rose marginally to Rs 0.30 trillion from Rs 0.28 trillion, primarily driven by elevated slippages in the microfinance and unsecured retail books at select banks.
The NNPAs decreased by 9.9% to Rs 0.88 trillion from Rs 0.97 trillion. Of this state-run banks’ fell by 19.1% to Rs 0.52 trillion, while that of private banks increased by 8.1% to Rs 0.35 trillion, driven by stress in microfinance and unsecured segments.
During the quarter under review, the industry leader State Bank saw its GNPA falling under 2% to 1.73% from 2.55%, and NNPA plunging below 0.5% at 0.42% from 0.53%, which the chairman CS Setty said is at a two decadal low.
However, the industry best numbers are with Bank of Maharashtra—which for many years being the leader on lowest NPA front—with GNPA printing in at 1.72% (1.84%) and NNPA 0.18% (0.20%)-- the lowest in the industry.
According to the agency, banks’ aggregate provisioning also rose by 1.4% while the credit cost eased to 0.41% from 0.45% a year ago, reflecting stronger growth in assets compared to a rise in provisioning.
But private sector banks saw a 27.5% on-year increase in credit cost, mainly due to extra contingency and floating provisions made by two major banks, as well as one-time provisioning related to discontinued crop loan variants. This was also because some of them made modest ECL-related provisions. In comparison, public sector banks reported a 17.7% on-year decline in credit cost.
Restructured assets declined to 0.52% of net advances, marking a reduction of 9 bps from the previous quarter.
In comparison in March 2018, NNPAs was 6%, and has declined sharply to 0.5% in September 2025, making it the lowest level in the post-AQR period and stable for the past three consecutive quarters. This sustained improvement reflects the combined impact of large-scale write-offs, steady recoveries from legacy NPAs, stronger provisioning buffers, sales to ARCs and timely resolutions under the IBC framework. While overall asset quality remains robust, the pace of fresh recoveries has stabilised in recent quarters, as the stock of legacy stressed assets continues to shrink.