PSU banks’ slippage ratios improve as lending to low-risk retail loans rise

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26 Aug, 2025 12:21

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State-owned banks have reported a decline in slippage ratios over the past one year, indicating a significant improvement in asset quality across the sector, with lending getting skewed towards low-risk retail loans.

Analysts said that the improvement in the slippage ratios is due to both structural and cyclical changes. Sanjay Agarwal, Senior Director at CareEdge Ratings said that incremental lending has been skewed towards the retail segment, particularly mortgages, which typically carry lower delinquency levels. On the other hand, growth in unsecured retail loans has been measured, and fresh corporate delinquencies have been chunky but limited.

A review of data from 12 leading PSU banks reveals that most lenders have reported their lowest or near-lowest slippage level in over a year, with some hitting multi-year lows.

According to data compiled by Moneycontrol, the slippage ratio of Indian Bank fell to 0.94 percent in Q1FY26 from 1.50 percent in Q1FY25, while for Union Bank of India it dropped from a high of 2.40 percent in Q2FY25 to 0.99 percent in Q1FY26. Indian Overseas Bank posted the lowest Q1FY26 slippage ratio among state-owned banks at 0.10 percent.

However, few banks such as Bank of Baroda, Bank of Maharashtra and Central Bank of India reported a rise in slippage ratios.

“Slippages remained contained for most PSBs, supported by minimal exposure to unsecured lending,” Motilal Oswal said in a recent note.

Sanjay Agarwal of CareEdge said that systemic improvements such as the IBC and enhanced monitoring frameworks have contributed to the reduction in the slippage ratio. Increased digitisation and the use of data from credit information bureaus have also enabled early detection of stress and better borrower assessment. “Together, these measures have enhanced the overall efficiency of the banking ecosystem, contributing to reductions in fresh slippages.”

Private banks faced higher slippage levels in Q1FY26 due to their greater exposure to unsecured retail and microfinance segments. On the other hand, PSU banks continued to outperform on this front, owing to a more conservative lending approach and stronger performance from corporate borrowers.

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During the June quarter, state-owned banks outperformed their private counterparts in terms of fresh slippages. Motilal Oswal said that private banks’ slippages saw an uptick amid seasonality and stress in the unsecured segment, while on the other hand, slippages remained contained for most state-owned lenders.

The primary reason for this trend is that private banks have a higher share of retail unsecured credit card and personal loans in their portfolio, along with exposure to the MSME segment. PSU banks, on other hand, have higher corporate loan exposure, a space that is performing well.

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Going ahead, as corporate balance sheets remain robust and retail lending gets cautiously calibrated, analysts see slippage ratios to stay subdued for PSU lenders, but macroeconomic risks around global interest rates and inflation could still pose challenges.