Strong credit growth without adequate prudential vigilance can sow seeds of the next NPA cycle. Critically examine in light of FY26 trends.

Q. Strong credit growth without adequate prudential vigilance can sow seeds of the next NPA cycle. Critically examine in light of FY26 trends. (15 marks, 250 words)

FY 2025-26 saw Scheduled Commercial Banks' non-food credit surge to 15.9%, a 497-bps jump over FY25, reviving industry and MSMEs [1]. Yet lending booms historically precede NPA busts — the caution is valid, though not deterministic given today's repaired balance sheets.

Seeds of risk in the FY26 pattern - Retail concentration: personal loans grew 16.2% and now form 33% of credit [1][2]; heavy vehicle and gold-backed lending reflects both aspiration and household stress. - Overheated small-industry credit: micro & small industry lending rose 33.1% (≈3.7× FY25 pace) [1] — rapid expansion can mask weak underwriting. - NBFC pass-through: services credit led at 19% [1], much routed via NBFCs, raising concentration and shadow-banking risk. - Credit outpacing output: growth above nominal GDP lifts credit intensity — a classic late-cycle warning [1].

Prudential buffers containing the risk - Cleaner books: NPA recovery rate doubled from 13.2% (FY18) to 26.2% (FY25) [3], with GNPAs at multi-decadal lows. - Institutional guardrails: IBC 2016, the PCA framework, the 90-day NPA norm, and RBI's monthly Sectoral Deployment monitoring [2] enable early correction. - Priority Sector Lending channels agri and MSME credit productively [1].

Thus a fresh NPA cycle is not inevitable — FY26 growth rests on stronger fundamentals — but the statement's warning holds where unsecured retail and NBFC exposures outrun underwriting. Countercyclical buffers, calibrated risk weights, and vigilant supervision must keep pace, aligning credit with financial stability.

(~250 words)

Sources: 1. PIB — SCBs Record Robust Credit Growth of 15.9% in FY 2025-26 — 15.9% non-food credit growth, 497 bps rise, sectoral shares (personal 33%/16.2%, services 19%, micro & small 33.1%), credit outpacing GDP 2. RBI — Data on Sectoral Deployment of Bank Credit — sectoral credit deployment and monthly monitoring basis 3. PIB — Asset Quality of SCBs; NPA Recovery Rate Doubles 13.2% → 26.2% — NPA recovery rate and balance-sheet cleanup