Credit costs of banks surge in Q1FY26; asset quality marginally weakens: CareEdge Ratings

New Delhi [India], August 21 (ANI): The credit costs of scheduled commercial banks (SCBs) in the country surged in the first quarter of the current financial year, even as their asset quality worsened marginally on a sequential basis, according to a report by CareEdge Ratings.
The report highlighted that the overall credit cost for SCBs rose sharply by 62.7 per cent year-on-year to Rs 0.44 lakh crore in Q1FY26.
It stated "Credit Cost Rises in Q1FY26; Asset Quality Worsens Marginally Sequentially".
However, the trend was not uniform across public sector banks (PSBs) and private banks (PVBs). While PSBs reported an improvement, PVBs faced a steep rise in provisioning requirements.
For PSBs, credit cost fell 4.8 per cent year-on-year to Rs 0.16 lakh crore during the quarter. The report noted that large PSBs, in particular, witnessed a notable rise in provisions, though overall the segment showed relative stability supported by stronger asset quality.
On the other hand, credit costs of PVBs increased significantly by 172.1 per cent year-on-year in the same quarter. This sharp rise was largely driven by one major private bank, which created contingency and floating provisions of Rs 0.11 lakh crore.
The bank made use of stake sale gains in its subsidiary as well as treasury gains to build this buffer. Excluding the impact of this one-time provisioning, the credit costs for private banks would have stood at Rs 0.17 lakh crore, which still represents a 64.3 per cent year-on-year increase.
In terms of business growth, the report stated that credit offtake in Q1FY26 expanded by 9.5 per cent year-on-year, slightly below deposit growth, which came in at 10.1 per cent. Going ahead, growth in both credit and deposits is expected to remain moderate.
Asset quality, however, remained broadly healthy despite the marginal sequential deterioration. Supported by recoveries and controlled fresh slippages, the gross non-performing asset (GNPA) ratio of SCBs is projected to stay in the range of 2.3-2.4 per cent by the end of FY26.
Stress in unsecured personal loans and microfinance institutions (MFIs) is being offset by corporate deleveraging and a declining stock of GNPAs.
The report further observed that the clean-up of stressed assets that began over a decade ago, along with regulatory changes strengthening creditor rights, has already played out in the banking sector. Credit costs, which had been on a downward trajectory, now appear to have peaked.
While PSBs are likely to benefit from stable or lower costs on the back of stronger asset quality, PVBs may continue to face higher provisioning needs due to incremental slippages. (ANI)