The banking sector is facing a potential surge in credit costs during fiscal year 2026, according to a new report from CareEdge Ratings. The primary concern stems from growing pressure within the unsecured lending and microfinance sectors. While recent trends show a decrease in credit costs, this positive trajectory might soon reverse.

The report highlights a worrying trend: increasing stress in the personal loan segment could trigger a slight decline in asset quality. However, the outlook isn’t entirely bleak. Public sector banks (PSBs) currently boast strong provision coverage ratios, acting as a crucial buffer against potential losses. This suggests a greater level of resilience within PSBs compared to their private sector counterparts, who appear more vulnerable to the predicted rise in credit costs.

This developing situation underscores the importance of careful monitoring of the unsecured lending and microfinance sectors. The potential for increased credit costs in FY26 warrants close attention from both banks and regulators alike. The differing levels of exposure between PSBs and private banks also presents a fascinating dynamic within the industry, highlighting the varying strengths and vulnerabilities within the financial landscape.