Public sector banks drive record profits in India for FY25 amidst asset quality improvements

Time of India

a day ago

Public sector lenders were at the vanguard of driving FY25 banking profits in India to the highest ever in history, as earnings from lending, treasury gains, and lower bad-loan provisions saw the industry's combined bottom-line soar nearly 14 times in a decade to Rs 3.71 lakh crore.
Last fiscal year, public sector banks — once weighed down by legacy stress and bad loans — reported a robust 26% rise in profits to `1.83 lakh crore, narrowing the gap with private banks, which saw a relatively circumspect 7% increase to Rs 1.87 lakh crore, data compiled by ET showed.
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A research report by Motilal Oswal Finance Services on banking outlook said, 'Banks are prioritising asset quality over growth, with stricter credit filters, higher CIBIL score thresholds, and conservative underwriting—especially in retail segments… PSU banks' disbursements remain modest while private players have gained share.
State Bank of India
, the largest government asset by market capitalisation, posted the highest net profit of `70,900 crore, followed by private lender HDFC Bank— at Rs 67,347 crore.
ICICI Bank
's net profit was Rs 47,227 crore in FY25. However, a sharp fall in earnings reported by
IndusInd Bank
and
IDFC First Bank
dented the overall profits of private sector banks.
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Although in FY16, the net profit of all commercial banks was Rs 24,854 crore it was mainly because of higher earnings contributed by private banks. Lenders subsequently embarked on a balance sheet clean-up, nudged by the regulator and aided by a revamped bankruptcy legislation that aimed at quickly extricating billions of dollars stuck in leveraged assets.
'The key driver of the impressive rise in profits is the stable credit growth in FY25 on top of the good growth in FY24,' said VK Vijayakumar, chief investment strategist, Geojit Investments. A year ago, the total net profit of all commercial banks was Rs 3.19 lakh crore. 'A major concern at the beginning of the year was deposits lagging credit growth. But as the year progressed, the deposit growth converged with credit growth,' he added.
Asset quality
The impressive earnings come in the backdrop of the clean-up that started in 2015 with asset quality review (AQR) under the then central bank governor Raghuram Rajan. That caused PSU banks to report huge losses for three consecutive years while bad loans scaled past 8% of advances in FY16.
The government supported PSU banks with growth capital by infusing Rs 3.15 lakh crore since AQR in 2015, according to the Economic Capital Framework report released last week.
The AQR exercise led to better income recognition of non-performing loans and higher provisions. In the following year, the enactment of Insolvency and Bankruptcy Code improved recovery for banks giving them an upper hand in negotiation with defaulters. Insolvency and Bankruptcy Board of India (IBBI) data shows that creditors have recovered nearly Rs 3.9 lakh crore in 1,194 cases until March 2025.
Giving the outlook on stressed loans, Subha Sri Narayanan, director, Crisil Ratings, said 'Gross non-performing assets (NPAs) have bottomed at 2.4% as of March 31, 2025, and are seen rangebound at 2.4-2.6% by March 2026. While
corporate NPAs
would remain low on strengthened risk management of banks, and robust balance sheets of corporates.'
In a net interest margin (NIM)—a key profit indicator—outlook for FY26, Vishal Narnolia, analyst, ICICI Direct, said, 'In the first half, NIMs are expected to decline around 15 bps as there is a strong probability of policy rate cut which the banks will have pass to EBLR-linked borrowers.' He said that in the second half of this fiscal, deposit repricing is expected to aid recovery in margins and overall margins are likely to decline by around 10 bps for FY26.
For most banks, NIM—the difference between interest income earned and interest expense—is between 3% and 4%. According to Vijayakumar of Geojit, the outlook for the banking sector continues to be positive.
'However, there are some concerns arising out of rising delinquencies in unsecured loans, credit cards and stress in the microfinance segment which can moderate profit growth in FY26,' he said.