Indian Banking Sector: Strong Growth, Rising Margin & Asset Risks

The Indian banking sector remained resilient in Q3 FY25, with steady loan growth despite emerging caution in select segments. Private banks continued to outpace public sector counterparts in credit expansion, while deposit growth picked up momentum, though at the cost of declining CASA ratios. However, margin pressures persisted across the industry due to rising funding costs, and asset quality concerns resurfaced, particularly in unsecured and SME lending. As banks navigate these challenges, the focus is shifting toward risk-adjusted growth, liquidity management, and strategic lending to sustain profitability in the coming quarters.

Loan Growth Remains Strong, But Caution Emerging in Certain Segments

Overall loan growth remained robust across major banks, with advances growing ~10-15% YoY across the sector.

• Private banks outperformed public sector banks, led by ICICI Bank (13.9% YoY), Kotak Bank (15.1% YoY), and SBI (13.8% YoY).
• Retail and corporate lending were the primary growth drivers, while SME and unsecured loan segments saw some slowdown due to rising credit risk.
• Vehicle finance and microfinance segments showed increased stress, leading to cautious lending by banks like IndusInd, Ujjivan SFB, and Equitas SFB.

Deposit Growth Outpaced Loan Growth, But CASA Ratios Declined

Deposit growth was strong (~10-14% YoY), but the cost of funds increased as banks raised high-cost term deposits.

• CASA ratios declined across most banks, reflecting a shift toward fixed deposits (FDs) due to higher interest rates.
• HDFC Bank’s CASA fell 367 bps YoY, Axis Bank (-264 bps YoY), Kotak (-541 bps YoY), and SBI (-200 bps YoY).
• ICICI Bank saw a slight CASA improvement to 39.4%, though still lower than historical trends.
• Public sector banks struggled more than private banks due to their higher reliance on CASA deposits, impacting their net interest margins (NIMs).

Net Interest Margins (NIMs) Under Pressure Across Banks

NIM compression was a common trend, mainly due to rising deposit costs and a shift in loan mix.

• Large private banks (ICICI, Kotak, Axis) maintained stronger NIMs (~4-5%), while PSUs and smaller banks saw a decline to ~3.0-3.2%.
• IndusInd, SBI, and Bank of Baroda reported sequential NIM contraction, while HDFC Bank’s NIM remained stable at 3.43%.

Profitability Trends: Large Private Banks Outperform, PSU Banks Face Margin Pressure

ICICI, Axis, and Kotak led the pack with strong profitability, driven by double-digit PPOP growth and lower credit costs.

• HDFC Bank posted moderate profit growth (+2.2% YoY), while SBI’s profit surged (+84.3% YoY) due to lower provisions.
• IndusInd Bank saw a significant 39% YoY decline in net profit, impacted by higher provisions and rising slippages in vehicle finance & microfinance loans.

Asset Quality: Stability in Large Banks, But Rising Stress in Unsecured & SME Loans

Large banks like ICICI, Kotak, and Axis reported stable or improving GNPA ratios.

• SBI and Canara Bank saw GNPA improvement, but concerns remain over unsecured loan slippages.
• Microfinance and SME segments showed higher stress, with banks like IndusInd, Ujjivan SFB, and Equitas SFB reporting rising delinquencies.
• Retail slippages increased in unsecured lending, with Axis Bank’s gross slippages rising to INR 54,320 Mn.
• Credit costs remained stable for large banks (~50-80 bps), but small finance banks and NBFC-linked lenders saw rising provisions.

Key Emerging Trends & Industry Outlook

🔹 Caution in Unsecured Lending & SME Loans
Banks are tightening lending norms for personal loans and microfinance loans due to rising defaults.

• Kotak, HDFC, and ICICI have reduced exposure to highly leveraged borrowers, while IndusInd & Ujjivan remain cautious in microfinance.

🔹 Deposit Growth & Funding Costs Will Be Critical
Banks are aggressively raising term deposits, impacting margins.

• While RBI rate cuts in the coming quarters could provide relief, competition for deposits remains high.

🔹 NIMs Likely to See Further Compression
Rising deposit costs & shifting loan mixes will continue to put pressure on NIMs.

• Large banks with a strong CASA base will manage better than PSUs & small finance banks.

🔹 Retail & Corporate Loan Growth Will Drive Earnings
Secured retail lending (home loans, auto loans) remains a strong growth driver.

• Banks with strong corporate relationships (SBI, ICICI, Axis) are likely to gain market share.

Conclusion: Resilient Sector, But Challenges Persist

The banking sector demonstrated resilience in Q3 FY25, with private banks maintaining their lead in loan growth, profitability, and asset quality. However, rising stress in unsecured lending and microfinance segments has led to a more cautious lending approach across the industry. Deposit growth remains strong, but higher funding costs continue to squeeze net interest margins, particularly for the public sector and smaller banks. In the coming quarters, liquidity management and deposit mobilization will be critical, while credit growth is expected to moderate as banks prioritize risk-adjusted lending. With RBI’s monetary policy decisions playing a key role, potential rate cuts could provide some relief, though competition for deposits and margin pressures will likely continue shaping the sector’s trajectory.

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