Deleveraging in unsecured lending and limited exposure to vulnerable segments are expected to keep fresh bad-loan risks contained
Indian banks are likely to maintain stable asset quality despite ongoing geopolitical uncertainty in West Asia, with slower growth in unsecured lending and reduced exposure to vulnerable segments helping contain the risk of fresh bad loans, according to a Goldman Sachs report.
The global investment bank said the asset quality outlook for Indian lenders has improved significantly over the past five years, with overall stress remaining contained. It also expects the impact of the West Asia crisis on banks’ asset quality to remain limited.
Concerns around bad loans have largely been concentrated in granular unsecured lending, particularly consumer unsecured loans and the microfinance (MFI) segment. Goldman Sachs said aggressive lending in these segments had contributed to overleveraging and triggered an NPL cycle, with the impact largely confined to mid-sized private banks.
State-owned banks had no exposure to this segment, while large private banks experienced negligible to manageable stress, the report said.
The risk of fresh stress has also moderated following significant deleveraging over the past 12-18 months. The MFI loan book has contracted 25% from its peak of Rs 4.4 trillion in March 2024. Meanwhile, consumer unsecured loan growth slowed to 10-12 per cent in FY25 and FY26, sharply lower than the 25-30 per cent growth recorded in FY23 and FY24.
More from BusinessDespite the moderation, Goldman Sachs said consumer credit remains structurally underpenetrated in India. Unsecured loans account for only around 18 per cent of the overall retail loan book, suggesting that the segment still has room for growth.
The MFI sector also has an added cushion, with around 80-90 per cent of the loan book at several banks now covered by the government-backed Credit Guarantee Fund for Micro Units (CGFMU). This could help limit the impact on banks if NPL formation rises sharply.
Overall, Goldman Sachs’ assessment suggests that Indian banks are entering a period of geopolitical uncertainty with stronger asset-quality buffers, lower exposure to risky unsecured lending and more disciplined credit growth.
