Mumbai, 25 August 2025:
The performance of Scheduled Commercial Banks (SCBs) in India has seen a mixed bag of results in the first quarter of FY26. Despite a noticeable rise in net profits, the numbers come with caveats that could impact the banking sector’s sustainability moving forward. According to recent reports, SCBs recorded a 3.1% year-on-year increase in net profit, amounting to Rs 0.92 lakh crore. This growth was primarily due to treasury gains and one-off income from a prominent private bank. However, profits dipped by 2.2% sequentially, showcasing concerns such as muted credit growth and rising provisioning costs.
Public Sector Banks Outperform Private Sector Counterparts
In an interesting turn of events, Public Sector Banks (PSBs) have outperformed their Private Sector counterparts in terms of profitability. PSBs reported a significant net profit growth of 10.9% year-on-year, reaching Rs 0.47 lakh crore. Factors behind this robust performance include treasury gains facilitated by easing bond yields, recoveries from previously written-off accounts, and growth in housing loans from larger lenders. Meanwhile, Private Sector Banks (PVBs) faced challenges, with profits declining by 3.9% year-on-year to Rs 0.45 lakh crore. This dip can be attributed to stress within the microfinance sector and heightened provisioning requirements for unsecured loans.
Analysts at CareEdge Ratings have expressed caution regarding the future trajectory of profitability in the banking sector. With expectations of normalisation in treasury gains and continuing elevated funding costs, banks might face severe pressure on their bottom lines. The report highlighted that while PSBs were able to maintain a steady Return on Assets (RoA) at 1.05%, PVBs saw theirs slip by 24 basis points year-on-year, landing at 1.65%. Such statistics point toward the critical need for PVBs to refine their strategies and mitigate risks associated with asset quality.
Capital Adequacy and Risk Management
Despite facing headwinds, the banking sector has strengthened its capital buffers, a crucial aspect of maintaining stability. The median Capital Adequacy Ratio (CAR) for SCBs improved to 17.6%, significantly surpassing the regulatory requirement of 11.5%. Meanwhile, PSBs reported a median CAR of 17.7%, while PVBs stood at 17.1%. These metrics reflect a robust internal capital generation and the benefit of bond issuances, crucial during these turbulent times.
With the festive season on the horizon, banks are anticipating an uptick in credit demand. PSBs, in particular, appear to be well-positioned to leverage this moment due to their favorable credit-deposit ratios and lending capacity. The pressing question remains: will PVBs successfully navigate these prevailing challenges? Analysts suggest that they must focus on asset quality and robust cost control to offset the impacts of faltering growth in unsecured portfolios.
Future Outlook for Indian Banks
Looking ahead, the Indian banking landscape is likely to witness evolution in response to ongoing economic shifts. The emphasis on recovery in credit demand and adept management of provisions will be pivotal for SCBs. The balanced assessment of risks from microfinance and small-ticket loans will play a crucial role in determining the overall health of PVBs. As financial resilience becomes a growing concern, banks that adapt quickly can capitalize on emerging opportunities in the ever-evolving market.
The insights shared by CareEdge Ratings underscore the importance of vigilance in navigating the complexities of the Indian economy. As treasury gains continue to normalize, banks must lean more toward organic growth through quality lending and more strategic asset management.
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Original source: bfsi.economictimes.indiatimes.com
