Banks face margin pressure despite record-low NPAs

Scheduled commercial banks (SCBs) continued to face pressure on margins in Q4FY25, with net interest margins (NIMs) declining by 21 basis points year-on-year (y-o-y) to 2.99%, according to the latest CareEdge Ratings report. This contraction in margins is attributed to slower credit growth, especially in high-yield segments, elevated deposit rates, and a significant slowdown in current account savings account (CASA) deposit growth.

The CASA ratio fell to 36.9% compared to last year, reflecting intensified competition to attract deposits and a shift towards higher-cost term deposits, which grew robustly at 14.1% y-o-y. Further highlighting margin challenges, interest expenses surged by 11.3% y-o-y due to repricing of existing deposits. Public sector banks (PSBs) saw a sharper increase of 12.3%, while private sector banks saw a rise of 9.6%.

Overall, the banks saw a modest growth of 3.6% y-o-y in net interest income (NII) to ₹2.09 lakh crore. However, elevated deposit rates, driven by intense competition to mobilise funds amid tight liquidity conditions, partially offset this gain. Sequentially, NII rose marginally by just 0.7%.

Pertinently, total income of banks increased by 8.4% y-o-y to ₹6.3 lakh crore, but significantly lower than the previous year’s 25% growth rate, largely attributed to a high base effect and reduced exposure to high-yielding segments amid competitive pressures.

Asset quality

On a positive note, the net non-performing asset (NNPA) ratio reached an all-time low of 0.5%, down from 0.6% in the previous year, with absolute NNPAs declining by 21.7% y-o-y to ₹0.90 lakh crore. The annualised credit cost ratio also improved to 0.45% from 0.55% in the previous year.

Net profit grew by 4.3% y-o-y, reaching ₹0.93 lakh crore, driven by business expansion, reduced provisions, and increased other incomes. PSBs recorded robust profit growth of 13.1% to ₹0.51 lakh crore, benefiting from improved asset quality, normalised operating costs, and significant treasury gains driven by lower bond yields. Conversely, private banks' net profit fell by 4.7% y-o-y to ₹0.42 lakh crore, primarily due to substantial losses incurred by one private banks from accounting discrepancies and challenges in the microfinance sector. Excluding this bank, private banks' profits would have grown by 5.4% to ₹0.46 lakh crore.

Return on assets (RoA) decreased by eight bps y-o-y to 1.34% in Q4FY25, impacted by margin pressures and asset-quality stresses. PSBs reported slight improvement in RoA, while private peers saw a substantial decline driven by elevated credit costs and accounting issues in one significant private bank.

Moderate credit growth

Advances by banks increased by 11.4% y-o-y in Q4FY25. Public sector banks witnessed comparatively stronger credit growth of 12.9%, whereas private banks grew moderately at 8.7%. Growth in credit to the services sector slowed significantly to 12.4%, notably impacted by reduced lending to NBFCs and commercial real estate. Adjusting for certain loan sales by one large private bank, the overall credit growth for private banks stood at around 10%.

Operating expenses for SCBs rose by 6.7% y-o-y, driven primarily by increased non-employee costs, particularly due to performance-linked incentives at a large PSB. PSBs' other operating expenses jumped significantly by 17% y-o-y, while employee costs grew only marginally at 1.6%.

Meanwhile, improved treasury income provided relief, driven by lower government bond yields, down by 60 bps y-o-y to 6.66%. PSBs notably boosted their held-to-maturity (HTM) portfolios, reducing mark-to-market volatility and capitalising on treasury gains amid softened yields.