Context:
Indian banks faced a challenging Q4 FY25, marked by slower loan and deposit growth, shrinking net interest margins (NIMs), and persistent system liquidity pressures. Despite the seasonally strong March quarter, tight liquidity, lagging deposits, and a 25-bps RBI rate cut in February weighed heavily on performance.
Key Takeaways
Loan Growth Trends
- Deceleration across multiple banks:
- Punjab National Bank, Bank of India, IDFC First Bank, Yes Bank, Bandhan Bank, IDBI Bank, and South Indian Bank saw loan growth drop to 8-20% YoY in Q4 FY25, down from 12-22% in Q3 FY25.
- HDFC Bank showed improvement in loan growth to 5.4% from 3% in the previous quarter.
- IndusInd Bank saw a sharp decline, with net advances growing only 1.4% YoY and contracting 5.2% QoQ, primarily due to a pullback in its corporate loan portfolio.
Deposit Growth Trends
- System-wide deposit growth averaged 10.5%, down from 11.5% in Q3 FY25.
- Individual banks reported lower domestic deposit growth of 7–25% YoY, compared to 14–29% in Q3.
- HDFC Bank saw deposit growth slow slightly to 14.1% from 15.8%.
Net Interest Margin (NIM) and Rate Impacts
- The February rate cut led to a drop in lending rates, with the average weighted lending rate declining to 9.78% from 9.85%.
- Deposit rates remained sticky at 7.02%, exerting margin pressure as loan yields dropped but deposit costs stayed high.
- Kotak Institutional Equities flagged potential disappointment in NIMs, with no visible short-term recovery drivers.
System Liquidity and Credit Challenges
- Liquidity deficit in Jan–Mar estimated at ₹1.5–₹3 trillion.
- Non-food credit growth averaged 11.2%, only marginally above Q3’s 11.1%.
- Retail lending stress rose due to:
- Higher delinquencies in small-ticket personal loans and microfinance.
- Regulatory tightening impacting unsecured loan segments.
Asset Quality Risks
- ICRA highlighted concerns around asset quality deterioration, especially for banks with large unsecured loan books.
- Lenders with high exposure to risky retail segments could see further deterioration in loan performance metrics.
The fourth quarter of FY25 has exposed growing vulnerabilities in India’s banking sector—slower credit demand, deposit mobilization hurdles, and pressure on margins and asset quality. With the RBI rate cut having minimal positive impact on credit growth and continued stress in retail segments, banks may face an uphill battle in maintaining profitability in FY26.
