Asset quality across India's banking sector remained broadly stable during the fourth quarter of FY26, although lenders have cautioned that geopolitical tensions in West Asia could pose risks to credit quality in the coming quarters, according to a report by Systematix Research.

The report noted that most banks under its coverage universe continued to maintain healthy asset quality metrics, with net slippage ratios remaining under control despite macroeconomic uncertainties and pressure on margins following the repo rate cut cycle. "The slippages in the quarter were broadly in control with most coverage banks reporting sub 80bps of net slippage ratio (except IIB)," the report said.

According to the report, the banking sector's overall credit cost trend also remained largely stable sequentially, though some lenders created additional prudential buffers using one-off recoveries and tax-related gains. Public and private sector lenders alike continued to strengthen their balance sheets amid global uncertainties.However, banks flagged emerging external risks stemming from the ongoing conflict in West Asia.

The report said lenders do not yet see any immediate stress build-up in loan books, but they expect the actual impact of geopolitical tensions to become visible over the next few quarters."There is no incipient rise in asset quality yet but the banks expect the true impact of the west Asia war to be visible in Q2FY27 or in H2FY27," the report stated.

Among the banks reviewed, private lenders such as ICICI Bank, HDFC Bank and Kotak Mahindra Bank reported relatively resilient asset quality trends, while PSU banks also maintained stable slippage ratios. Indian Bank, however, saw a rise in slippages due to year-end adjustments linked to memorandum of changes (MOC), according to management commentary cited in the report.

The report further highlighted that government-backed schemes such as Credit Guarantee Scheme for Microfinance Institutions 2.0 (CGSMFI 2.0) and Emergency Credit Line Guarantee Scheme 5.0 (ECLGS 5.0) could help cushion potential stress in vulnerable loan segments if external conditions worsen. "Though we assume an upside risk to asset quality in the coming quarters the recent government schemes (CGSMFI 2.0 and ECLGS 5.0) will act as a buffer," the report added.

Systematix maintained a positive stance on the banking sector overall, supported by healthy credit growth, stronger provision buffers, granular deposit mobilisation and steady recoveries from written-off accounts.

Published on May 18, 2026