Indian Banking Sector Faces Unexpected Q3FY25 Downturn

The Indian banking sector endured a tougher-than-expected Q3FY25, with slowed loan and deposit growth, increased credit costs, and reduced profitability, particularly affecting microfinance and mid-sized banks.

The Indian banking sector faced a harsher impact in the third quarter of FY25 than was previously anticipated, according to a report by Centrum. This report pointed to a significant slowdown in loan and deposit growth, increased credit costs, and weakened profitability across the majority of banks.

The report described the period as challenging for banks within their coverage, driven by a continuous downtrend in the microfinance segment, affecting small finance banks, alongside an overall slowdown in system credit growth. The actual impact was more dire than expected, as evidenced by Q3FY25 results. Sequential loan book growth during this period was 2.8% quarter-on-quarter, a notable decrease from 5.4% in Q3FY24. Similarly, deposit growth weakened to 2.7% QoQ compared to 3.9% in the same time the previous year.

While a difficult quarter was anticipated due to the downturn in the microfinance sector, the actual outcomes were worse, with asset quality deteriorating and gross slippages rising by 70 basis points QoQ. Federal Bank stood out as the only exception. Credit costs increased for most banks, except for Suryoday Small Finance Bank, which experienced a steep decline in its provision coverage ratio owing to policy adjustments for loans insured under the Credit Guarantee Fund for Micro Units scheme.

The challenging climate led to compression in net interest margin and weaker net interest income growth throughout the banking sector, exacerbating profitability pressures. The Q3FY25 results underscored that the sector's stress was more severe than foreseen. MFI-centered banks were significantly impacted, while mid-sized banks grappled with decelerating credit growth and escalating costs.

According to the report, Q3FY25 results confirmed unexpected stress levels within the banking sector, specifically affecting MFI-focused players. Mid-sized banks also struggled with slower credit growth and increased costs. The report underlines the necessity for banks to carefully navigate these challenging conditions in the upcoming quarters. (ANI)