Tough Days for Banking Sector

Some banks of which City Union Bank, Karnataka Bank, Bandhan Bank, South Indian Bank, DCB Bank, and Punjab & Sind Bank have net NPAs over 1%.

Key Highlights:

• The banks such as Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Indian Bank, and Punjab National Bank have net NPAs below 0.5%.
• Gross NPAs
• Bandhan Bank, J&K Bank, and PNB are holding bad loans above 4%.
• Axis Bank & HDFC Bank are with gross NPAs of less than 1.5%.

NPAs Trend Analysis

• Private banks experienced a slight upturn in gross NPAs (₹1.35 trillion in Sep 2024 → ₹1.39 trillion in December 2024).
• public sector banks, part of which are CBA%, reduced the gross NPAs from ₹4.93 trillion in December 2023 to ₹4.47 trillion in December 2024.

The Effect of RBI’s Unsecured Loan Measures

• RBI raised risk weights on unsecured loans in Nov 2023, thus increasing their cost.
• Through this, the growth of bad loans has been controlled.

Interest Income & Profits

• Net Interest Income (NII) rose
  • To Private banks: ₹93,416 crore → ₹1.02 trillion (YoY growth: 8.88%)
  • From PSBs: ₹1.02 trillion to ₹1.07 trillion (YoY growth: 5.44%)
• Net profit
  • Private banks: Grew 3.79% YoY but registered a fall of 2.48% QoQ.
  • PSBs: Grew 46.81% YoY but registered a fall of 2.36% QoQ.

CASA Ratio (Current & Saving Accounts Deposits) Declining

• Most banks have seen declines in CASA deposits, thereby suppressing low cost funding.
• Very few banks like Yes Bank, Union Bank, Indian Overseas Bank, Federal Bank have recorded minute increases in CASA.
• Top CASA Holdings States:
  • Bank of Maharashtra (49.28%)
  • Central Bank of India (49.18%)
  • J&K Bank (48.17%)

Net Interest Margin (NIM) Under Stress

• Almost all banks have reported low NIM for December quarter.
• Highest NIMs
  • Bandhan Bank (6.9%)
  • IDFC First Bank (6.04%)
  • IDBI Bank (5.17%)
• Further pressure would be created on NIMs by RBI’s rate cut, as banks would reduce their lending rates while deposit costs remain unchanged.
• Battle Continues Over Deposits
  • Some depositors returned to banks due to corrections in the equity market and lower mutual fund flows.
  • But the profit is getting squeezed due to high deposit costs.

Keeping aside investments, banks will brighten up the bad loans while facing challenges from low cost funding and with profit shrinkage. The rate cuts from the RBI and the war over deposits would keep the banks on their toes for the coming quarters.