Indian Banks Facing Challenging Times: Profitability in Transition

Indian banks are at a turning point, as their profitability is expected to become more moderate starting from the fiscal year 2025-26. The main reasons for this are the rising default rates on unsecured loans and higher credit costs, as recently announced by India Ratings. The rating agency notes that the remarkable improvement in financial metrics of the banks from 2021 to 2024 has reached its peak, and now a "turning point" is imminent. Particularly in the sectors of personal loans, credit cards, and microfinance, payment defaults are increasing, which is putting pressure on the banks' profits. The rising default rates mainly affect self-employed individuals, people with informal income sources, and younger population groups. Following the COVID-19 pandemic, personal loans and credit card debts saw strong growth, which was, however, facilitated by the erosion of the borrowers' incomes. To address the risks of non-performing loans, the Reserve Bank of India enforced higher capital requirements for personal loans and credit cards at the end of 2023, which is now resulting in slower growth in these segments. India Ratings adjusted its forecast for the banks' credit growth for 2024-25 to about 13.5% from previously 15%, due to both base effects and regulatory changes. For 2025-26, credit growth is expected to range from 13-13.5% and deposit growth from 12-13%, in light of the intense competition for low-cost deposit accounts. Non-bank financial companies (NBFCs) could also experience slower credit growth, rising credit costs, and margin pressure. "The pressure on the profitability of NBFCs could intensify further due to rising credit costs resulting from borrower over-indebtedness and slowed credit growth," according to India Ratings.