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Informist, Monday, Apr. 7, 2025

By Kshipra Petkar, Kabir Sharma, and Sachi Pandey

MUMBAI – Slower loan growth and falling margins are expected to weigh on profit of banks in the Jan-Mar quarter, acccording to pre-earnings reports by brokerages. The slowdown in loan growth is largely attributed to the slowdown in the retail segment, particularly in unsecured loans and mortgages. Conversely, corporate loans, including loans to small and medium enterprises, have exhibited resilience, showing signs of growth. Despite these pockets of strength, the overall deceleration in credit growth poses challenges to banks' earnings. 

For the eight public sector banks and 11 private banks that have reported provisional operational figures, the loan growth was lower on a year-on-year basis. Public sector banks have reported loan growth of 8.3-20.4% on year as of Mar. 31, while the latter reported loan growth of 1.4-20.3%. IndusInd Bank reported the lowest year-on-year loan growth of 1.4% on year and UCO Bank reported a loan growth of 20.4% on year.

Private sector banks' deposit growth was higher than that of public sector banks. Sequentially, deposit growth has picked up for these banks. Private sector banks' deposits grew 5.5-25.0% on year and 6.1-13.3% for public sector banks as of Mar. 31. South Indian Bank reported deposit growth of 5.5% on year and IDFC FIRST Bank reported deposit growth of 25.2% on year.

According to the Reserve Bank of India data, the on-year credit growth in the banking system was 11% on Mar. 21, a tad higher than the deposit growth of 10.3%. 

"With CASA accretion being a challenge and depositors preferring term deposits with higher rates, these factors could push CoF (cost of funds) to the higher side and thus could hurt NIMs (net interest margins)," Motilal Oswal Financial Services said in its report.

Banks are ecxpected to report lower growth in net interest income as compared to loan growth, brokerages said. For Jan-Mar, ICICI Securities estimates loan growth of 5–15% YoY, but range-bound net interest income growth of 6–7% on year. "We see better NII growth for mid-small banks such as IDFC FIRST Bank, City Union Bank, Karur Vysya Bank, DCB Bank, among others. As against nearly 8% on-year loan growth, we estimate nearly 6% year on year NII growth for coverage private banks," ICICI Securities said.

Due to the slower loan growth and pressure to mobilise deposits, brokerages expect banks' margins to remain under pressure this quarter. Few brokerages also said they expect to see a sharper decline in margins in 2025-26 (Apr-Jun) compared with the Jan-Mar quarter mainly due to the impact of the repo rate cuts by the Reserve Bank of India.  

Banks are expected to report stable asset quality for the Jan-Mar quarter, however, banks' margins are vulnerable on microfinance and unsecured retail portfolios, brokerage firms pointed out. There is also a potential stress in the credit card segment. While some banks have proactively made provisions for anticipated stress, the overall credit costs are likely to remain at normalised levels. 

Brokerages expect slippages to moderate on a sequential basis. IIFL Finance said it was seeing signs of early-bucket delinquencies stabilising in personal loans and credit cards. However, asset quality is seen deteriorating in small-ticket loans, personal loans, two-wheeler loans, and loans to micro, small, and medium enterprises. "The rate of retail NPA generation should slow, but ageing related provisions will play out. Basically, banks should move from the probability of default (PD) phase of retail stress to loss given default (LGD) phase," the report said.

Motilal Oswal Financial Services expects the asset quality stress to remain high for select banks such as IndusInd Bank, RBL Bank, Bandhan Bank, IDFC FIRST Bank, AU Small Finance Bank, and Equitas Small Finance, while large private and public sector banks are relatively better placed to navigate the current asset quality cycle.  End

Edited by Akul Nishant Akhoury

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