Icra Flags Risks on Small Biz Exposures, Feels FD Rates have Bottomed

Domestic rating agency Icra on Wednesday flagged lenders’ exposure to small and medium enterprises (SMEs) as a potential source of risk.

The agency also noted that the fixed deposit offerings by banks have bottomed out, and further reductions are less likely if the RBI holds on to the rates.

The agency has retained the banking system’s credit growth for FY26 at 10.5%, while projecting assets under management (AUM) of non-banking finance companies to grow by 15–17%.

It also maintained a "stable" outlook for the banking sector for FY26, and added that the uptick in consumption, the final US tariffs and their impact, the job market impact of lower growth, and asset quality concerns will be the key factors to watch.

Anil Gupta, a senior vice president at the agency, told reporters that there are signs of stress in the SME portfolio for lenders, with borrowings under ₹25 lakh by proprietorship companies showing signs of stress.

Loan losses in SME loans for non-bank lenders, including both secured and unsecured, have surged to 3.4% in March 2025 as against 3% in the year-ago period, the agency said.

Maintaining that the impact, if any, of the US tariffs is yet to play out in the financial system, he said the high-yield, low ticket-size products are showing the stress right now in loans sold typically at over 20% interest rates.

The agency, which feels that the nominal GDP will fall to 8.3% in FY26 from 9.8% in FY25, feels that if borrowers paying lower interest costs also start getting impacted, it can be illustrative of some broader difficulties.

A M Karthik, also a senior vice president, said that the second-order financial entity impact of the US tariff, if it plays out, will be on the banks and not on the NBFCs, because the former have exposure to exporters.

However, Karthik also added that he does not feel that the banking sector will feel any pinch of the US tariffs because the exposure to impacted exporters is very low.

Meanwhile, Gupta said that banks' fixed deposit rates have bottomed out, with major lenders offering 6% for 1-year tenor deposits and added that the net interest margins, which have been under pressure lately, will bottom out in the September quarter.

If the credit growth falters, there are chances that the banks may reduce the deposit rates as they will not have the confidence of deploying the money, he said, adding that this eventuality can play out even if there is no rate cut by the RBI.

There is room to cut the Marginal Cost of Funding based Lending Rates (MCLR) by another 0.50% over the next three quarters, he said, adding that the 1 percentage point reduction by RBI has not been transmitted in full.

The agency's chief economist Aditi Nayar said she does not expect the RBI to cut rates even in the October policy and added that the RBI is on for a long pause.

Nayar said the floods in north India are unlikely to cause much damage to inflation even though the yields may go down, and added that the resurgence in reservoir levels is a big positive.