New Delhi [India], February 18 : The Indian banking sector experienced a more severe impact in the third quarter of FY25 than previously anticipated, says a report by Centrum.
The report highlighted a noticeable slowdown in both loan and deposit growth, rising credit costs, and weakening profitability across most banks.
It said "a challenging period for banks in our coverage universe, driven by the continued downtrend in the microfinance (MFI) segment (which impacted small finance banks) and an overall slowdown in system credit growth. However, the actual impact was more severe than expected, as reflected in Q3FY25 results".
According to the report, sequential loan book growth in Q3FY25 stood at 2.8 per cent quarter-on-quarter (QoQ), a significant drop from 5.4 per cent in Q3FY24. Similarly, deposit growth also weakened, slowing to 2.7 per cent QoQ compared to 3.9 per cent in the same period last year.
The report had already predicted a tough quarter for banks, particularly due to the continued downturn in the microfinance (MFI) segment, which impacted small finance banks (SFBs). Additionally, an overall slowdown in system credit growth further contributed to the sector's challenges. However, the actual results were worse than expected.
Asset quality also deteriorated, with gross slippages rising by 70 basis points (bps) QoQ. Federal Bank was the only exception to this trend. Credit costs increased for most banks, except for Suryoday Small Finance Bank, which recorded a sharp decline in its provision coverage ratio (PCR) due to a policy change for loans insured under the Credit Guarantee Fund for Micro Units (CGFMU) scheme.
The challenging environment led to net interest margin (NIM) compression and weaker net interest income (NII) growth across the banking sector, further pressuring profitability.
Overall, Q3FY25 results confirmed that stress in the banking sector was more severe than expected. MFI-focused banks were hit the hardest, while mid-sized banks struggled with slower credit growth and rising costs.
Report said "Q3FY25 confirmed greater-than expected stress in the Banking sector, particularly for MFI-focused players while Mid-sized banks struggled with slower credit growth and rising costs".
The report highlights the need for banks to navigate these challenging conditions carefully in the coming quarters.
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