Beneath Shriram Finance’s strong headline PAT beat and the MUFG deal euphoria, the Q4 FY26 provision analysis table tells a more nuanced asset quality story — one where Gross Stage 3 assets have been climbing consistently through every quarter of FY26, Stage 2 stress has also ticked up sequentially, and the coverage ratio expansion is doing the heavy lifting in keeping net NPA contained. The sequential asset quality trend is the one metric that deserves closer scrutiny after an otherwise strong quarter.
Stage 3 — The Consecutive Quarterly Climb
Gross Stage 3 assets — the IFRS equivalent of gross NPA — stood at ₹1,37,432.7 million in Q4 FY26, up 4.74% from ₹1,31,214.4 million in Q3 FY26 and up 16.09% year-on-year from ₹1,18,387.9 million in Q4 FY25. The Gross Stage 3 percentage of the book stood at 4.58% against 4.54% sequentially — a 4 basis point deterioration.
The trend through FY26 is unmistakable when read quarter by quarter. Gross Stage 3 as a percentage was 4.55% in Q4 FY25, 4.53% in Q1 FY26, 4.57% in Q2 FY26, 4.54% in Q3 FY26, and now 4.58% in Q4 FY26. The number has not moved in a straight line but the direction across the full financial year has been sideways-to-slightly-worse rather than improving — which, for a company reporting strong AUM growth of 14.9%, means the gross impairment is growing faster in absolute terms than the book is being cleaned up.
Stage 2 — The Watch Category Is Also Elevated
Stage 2 assets — the early-warning watch category under IFRS 9 that captures loans with a significant increase in credit risk but not yet defaulted — stood at ₹2,07,463.3 million in Q4 FY26, up 5.73% sequentially from ₹1,96,228.4 million in Q3 FY26 and up 15.80% year-on-year. As a percentage of the book, Gross Stage 2 was 6.91% in Q4 FY26 against 6.78% in Q3 FY26 — a 13 basis point sequential deterioration.
Combined, Gross Stage 2 and Gross Stage 3 together represent 11.49% of the total book — a meaningful proportion that reflects the inherent credit risk profile of Shriram Finance’s commercial vehicle, used asset and consumer finance lending. This is not unusual for a lender in this segment but it is the number that the MUFG partnership and AAA rating need to be tested against over the coming quarters.
The Coverage Ratio — The Positive Offset
The one unambiguously positive element in the provision analysis is the Stage 3 coverage ratio. At 50.34% in Q4 FY26 against 48.77% in Q3 FY26 and 43.28% in Q4 FY25, the coverage ratio has expanded 322 basis points sequentially and 1,630 basis points year-on-year. This is what has driven Net Stage 3 down to 2.33% from 2.64% year-on-year even as Gross Stage 3 moved higher — the company is provisioning more aggressively against its stressed book, which is the correct and conservative approach.
The consequence of the coverage expansion is also visible in Net Stage 3 assets — ₹68,254.5 million in Q4 FY26 versus ₹67,218.2 million in Q3 FY26, up just 1.54% sequentially even though Gross Stage 3 rose 4.74%. The provisioning buffer is absorbing the gross slippage at the net level.
Stage 1 — The Clean Book Is Also Growing
Stage 1 — performing assets — grew to ₹25,65,455.7 million, up 3.59% sequentially and 15.46% year-on-year, with Gross Stage 1 as a percentage of the book at 88.51% — essentially flat with Q4 FY25’s 88.56%. The majority of the AUM growth is landing in the performing book, which provides the volume offset to the stress in Stage 2 and Stage 3.
The Overall Read
Shriram Finance’s asset quality picture in Q4 FY26 is best characterised as stable-to-slightly-deteriorating at the gross level and improving at the net level through provisioning. The consecutive quarterly increase in both Gross Stage 3 and Gross Stage 2 is the trend that analysts will ask management about on the results call — specifically whether the FY26 pattern of sideways gross NPA reflects seasonal commercial vehicle financing stress that will reverse in FY27, or whether it reflects a more structural deterioration in the portfolio’s credit quality as the book ages.
The 50.34% Stage 3 coverage ratio is the strongest argument that management has built sufficient buffers to absorb near-term slippage without material impact on reported profits. The MUFG capital infusion provides additional comfort. But for investors and analysts tracking Shriram Finance’s long-term credit trajectory, the Q4 FY26 provision analysis is a reminder that the AAA rating and the PAT beat coexist with an asset quality trend that requires watching carefully through FY27.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers are advised to consult a SEBI-registered financial advisor before making investment decisions.