Private sector banks are grappling with rising credit costs and slippages in the third quarter of FY25, highlighting concerns about asset quality, particularly in unsecured retail loans and microfinance portfolios. While growth in profitability remains muted for most banks, industry leaders are cautiously optimistic about a gradual normalisation of asset quality in the coming quarters.
Credit costs have spiked across the sector, with Axis Bank and Kotak Mahindra Bank witnessing multi-quarter highs due to elevated provisions. The pressures stemmed largely from slippages in retail unsecured loans, microfinance, and credit card segments.
Despite the challenges, banks expect these portfolios to stabilize by the first half of FY26, driven by improved provisioning policies and resolution strategies.
Q3 results
HDFC Bank reported a marginal 2% year-on-year growth in net profit for Q3FY25 at Rs 16,740 crore, with net interest margins (NIM) contracting sequentially to 3.43%. Seasonal agricultural loans contributed to a rise in non-performing assets, tempering overall performance despite robust deposit growth of 16% year-on-year.
While the bank’s robust deposit growth and stable asset quality provide a foundation for long-term stability, the near-term outlook remains subdued due to margin pressures and slower loan growth.
Axis Bank’s net profit grew 4% year-on-year to Rs 6,304 crore, but credit costs surged 74 basis points year-on-year due to higher provisioning for slippages in its unsecured portfolio. Similarly, Kotak Mahindra Bank and RBL Bank experienced higher provisioning for microfinance loans, with the latter reporting a steep 86% decline in net profit.
Axis Bank in its Q3 FY25 earnings call said that repricing from a potential rate cut will first impact the asset side first due to external benchmark-linked loans, and later on the liabilities side as well. The decline in other income for the quarter ending in December is attributed to trading income, with market volatility influencing adjustments. The private lender maintains a stable NIM of 4.36 per cent and a long-term target of 3.8 per cent.
However, ICICI Bank and Kotak Mahindra Bank delivered double-digit profit growth of 15% and 10%, respectively, for the quarter. ICICI Bank maintained strong profitability due to better asset quality management, while Kotak’s growth was achieved despite regulatory constraints on its digital initiatives.Mid-sized lenders such as IDFC First Bank and RBL Bank struggled, with significant declines in net profit due to higher provisions. IDFC First Bank’s profit fell 53% year-on-year, while RBL Bank recorded an 86% slump, reflecting pressure on asset quality in microfinance and credit card portfolios.
As the banking sector heads into FY26, private lenders are focusing on containment measures to mitigate rising delinquencies. While the near-term outlook remains subdued, normalization in asset quality and strategic adjustments in lending practices are expected to drive a recovery in profitability in the medium term.
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