Navigating India’s credit risk challenges in 2026

As the Indian banking sector marches towards 2026, credit-risk leaders face a shifting terrain. While asset quality has improved markedly, risks are accumulating in new pockets and under fresh dynamics. Below are six critical challenges that demand focused attention.

1. Asset-Quality Slippage and Rising NPAs

After years of improvement, asset-quality metrics are edging into caution territory. The Reserve Bank of India (RBI) projects the gross bad-loan ratio for scheduled commercial banks may increase from ~2.6% in Sept 2024 to about 3% by March 2026 under a baseline scenario — and up to ~5% under high-risk scenarios.

For credit-risk leaders, this means vigilance must shift from legacy large-borrower exposures to newer areas: unsecured retail, SME lending, and credit extended via NBFCs. The risk is less about a repeat of large-corporate stresses and more about subtle slippages in growing portfolios.

2. Surge in Unsecured Lending & Hidden Risk

The boom in unsecured credit — personal loans, credit cards, small-ticket unsecured MSME exposures — presents another concern. As per the Economic Survey 2024-25, ~51.9% of new retail NPAs originated from unsecured lending books.

Such unsecured exposures tend to have weaker underwriting, limited collateral and greater borrower overlap (many borrowers already carry secured debt). For credit-risk teams, this means moving beyond conventional risk indicators to early-warning signals: multi-loan borrowers, behavioural delinquencies, digital origination complexity.

3. Slowing Credit Growth, Cost of Funds Pressures

Credit growth is expected to moderate to around ~10.8% in FY2026, according to ratings agency ICRA — supported by policy easing but constrained by sluggish deposit mobilisation and rising cost of funds.

From a risk-perspective: weaker growth means banks may be tempted to chase higher-yield (and higher-risk) loans to maintain profitability. Credit-risk leaders must guard against underwriting erosion in pursuit of growth targets.

4. Regulatory and Governance Imperatives

The supervisory radar is shifting. The RBI is emphasising stronger governance, risk management, and tighter underwriting standards — especially around co-lending, digital originations and partnerships with NBFCs.

Credit-risk leaders must anticipate emerging regulation (e.g., co-lending frameworks effective Jan 2026) and embed compliance early: segregated governance for new products, vendor/fintech risk oversight, regular audit of digital origination flows.

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5. Technology, Data & Analytics Transformation

Credit risk modelling in 2026 won’t suffice with vintage score-cards. With rising unsecured exposures, more fragmented data sources (digital, alternate credit data, MSME data), the need is for dynamic modelling, real-time portfolio monitoring, and early-warning triggers.

Academic research already highlights hybrid AI models and advanced analytics for credit risk assessment.

For risk leaders: building capability to aggregate diverse data, deploy real-time alerts (for example borrower behaviour changes, cross-platform exposures), and continuously recalibrate models is non-optional.

6. Macroeconomic, Climate & Systemic Risks

Even though asset-quality is currently healthy, broader macro risks remain: slowing growth, geo-political uncertainties, inflation, higher interest rates, and climate-risk exposures (especially for infrastructure/ agriculture-linked portfolios). The RBI report specifically flags stretched valuations, high public debt and global shocks as risks.

Credit-risk leaders must stress-test portfolios for these eventualities: What happens if growth slows below expectation, or monsoons fail, or a sectoral shock hits? Embedded scenario-analysis and contingency planning must go hand-in-hand with day-to-day underwriting.

Strategic Implications & Action Agenda

To respond effectively, credit-risk leaders in Indian banks should prioritise:

• Early-Warning Systems: Deploy behavioural and digital signals to monitor unsecured portfolios in real-time.

• Underwriting Discipline: Tighten controls for unsecured and new product segments; ensure risk-adjusted pricing and collateral/guarantee norms.

• Data & Analytics Upgrade: Leverage alternate data (digital footprints, transaction-level data) and advanced modelling to detect borrower deterioration early.

• Governance & Ecosystem Risk: Establish oversight for fintech/ NBFC partnerships, co-lending structures, digital originations and third-party vendors.

• Stress-Testing & Scenario Planning: Simulate portfolio performance under adverse macro/climate/regulatory shocks and calibrate capital or provisioning buffers.

• Portfolio Diversification & Pricing Discipline: Balance growth goals with risk-return trade-offs; avoid “growth for growth’s sake” in high-risk segments.

For credit-risk leaders in Indian banking, 2026 is not simply about maintaining today’s asset-quality; it’s about being proactive in identifying the next risk frontier. The legacy toxic-asset problem may be largely behind us, but new vulnerabilities — especially in unsecured, digital, fintech and ecosystem-driven lending — are emerging. By embedding strong underwriting, advanced analytics, real-time monitoring and stress-based planning, banks can navigate this phase with both resilience and agility.