Articles
May 14, 2025
Indian banks to benefit from likely uptick in loan growth as profits rise
14 May, 2025 Indian banks to benefit from likely uptick in loan growth as profits rise By Yuvraj Singh and Beenish Bashir Indian banks are set to benefit from an expected uptick in credit growth after posting solid results for the year ended March 31 as liquidity conditions improve and interest rates fall. All six of the largest public and private sector banks in India logged growth in their fiscal full-year net income, helped by steady margins and lower provisions, according to data compiled by S&P Global Market Intelligence. Net income at State Bank of India, the country's largest lender, rose 16.1% to 709.01 billion rupees, with a net interest margin of 2.81%. HDFC Bank Ltd., the country's largest private sector bank, logged a 10.7% increase in net income, with its net interest margin clocking in at 3.45%. Loan growth at the banks is expected to recover after slowing in the year ended March 31, providing a potential boost to bank profits. Loan books of the six banks expanded by an average of 11.29% in the fiscal year, weaker than the 21.18% growth in the previous fiscal year, Market Intelligence data showed. Average loan growth at the banks is projected to slightly exceed 12% in the fiscal year ending March 2026, and 13% in the fiscal year ending March 2027, according to Visible Alpha's mean estimates based on at least three analyst contributions. "We believe credit growth could positively surprise this year," Kaitav Shah, research analyst at Anand Rathi Shares and Stock Brokers, told Market Intelligence in an interview. "With the new Reserve Bank of India governor at the helm, liquidity conditions have improved significantly. Many banks have indicated that the worst is likely behind them." "If the current liquidity environment continues, we could see an uptick in credit growth beyond current expectations," Shah said. Reviving credit demand Credit growth in India slowed after peaking in the fiscal year ended March 2024 as economic momentum weakened. India's GDP is estimated to have grown 6.5% in the year ended March 31, 2025, weaker than the 9.2% expansion in the prior year, according to the National Statistical Office's second advance estimates. The outlook is expected to improve as the Reserve Bank of India (RBI) announced several steps to support credit growth, including a 50-basis-point cut in the cash reserve ratio and rolling back increased risk weights on unsecured consumer and nonbanking financial companies lending. The central bank also resumed rate cuts for the first time in five years, reducing the repo rate by 25 basis points in February and following up with another 25-basis-point cut in April. Liquidity conditions improved after the RBI pumped liquidity into the system through open market operations, daily variable rate repo auctions, and dollar-rupee buy-sell swaps. "System liquidity was in deficit in January 2025," the RBI said in its April bulletin. "However, as a result of a slew of measures injecting liquidity of about 6.9 trillion rupees, the system liquidity deficit tapered during February-March 2025 and further turned into surplus on March 29." Credit growth may also get further lift from a reduction in the cost of deposits, which were elevated due to competitive pricing and a customer shift toward higher-paying term deposits. Profit divergence The credit growth tailwinds are likely to benefit private sector banks more than their public sector peers, analyst estimates showed. Net profits at public sector banks are expected to dip slightly in the fiscal year ending March 31, 2026. State Bank of India, for instance, is expected to record a 3.1% decline in net income to 687.20 billion rupees, according to Visible Alpha's estimates. On the other hand, HDFC Bank's net income is expected to grow 9.5% in the fiscal year to 737.20 billion rupees. Analysts cited several factors that could weigh on public banks' profitability compared to their private sector peers. "Public sector banks have been paying relatively higher rates on deposits, which puts pressure on net interest margins," Shah of Anand Rathi Shares and Stock Brokers said. "Also, many of them benefited in previous years from substantial recoveries on written-off assets. Such recoveries may not be as significant this year, leading to more normalized credit costs." Private banks are also better placed to capture growing retail demand, giving them a strong edge over public lenders. "Large private sector banks are more retail-focused and have better capital than public sector peers; as such, they have been growing at a faster pace than public sector banks," Deepali Seth Chhabaria, associate director at S&P Global Ratings, said in an email. As of May 14, US$1 was equivalent to 85.37 Indian rupees.
