The asymmetry in deposit and credit growth is the biggest challenge before the Indian banking industry.
For every ₹100 deposit that a bank mobilises, it needs to keep ₹3 with the banking regulator in the form of cash reserve ratio on which it doesn't earn any interest.
Another ₹18 is used for buying government bonds (statutory liquidity ratio).
This means, a bank is left with ₹79 for giving credit.
Add to this, its capital which can be used for giving loans. Most banks are facing a fund crunch. They need to find ways to attract deposits if they want to sustain credit growth, explains Tamal Bandyopadhyay.
Key Points
- Indian banks achieved a record-breaking combined net profit of ₹3.94 trillion in FY26, driven by strong performances from both public and private sector banks, yet they grapple with an escalating fund crunch due to disproportionate credit growth outstripping deposit mobilisation.
- State Bank of India led in net profit with ₹80,032 crore, followed by HDFC Bank and ICICI Bank.
- HDFC Bank and SBI both surpassed ₹1 trillion in operating profit, collectively holding over one-third of the banking industry's operating and net profit.
- The banking sector faces a significant challenge from the asymmetry in deposit and credit growth, with credit expanding faster than deposits, leading to a fund crunch.
- Despite overall good health, cracks are appearing in certain credit segments, and credit costs are expected to rise from their current benign levels.
The earnings season got over last month. Before we analyse the quarterly performance of listed Indian banks, let's take a look at how they performed in FY26.
The combined net profit of listed private and public sector banks is ₹3.94 trillion, the highest ever, 7.47 per cent higher than in FY25.
The private banks' collective net profit is up 4.02 per cent to ₹1.96 trillion and that of public sector banks by 11.13 per cent to ₹1.98 trillion. All figures are rounded off.
All PSBs have recorded a rise in net profit for the year -- the quantum of rise varies between 1.65 per cent (Punjab National Bank) and 56.18 per cent (Indian Overseas Bank).
In contrast, four private banks have reported a drop in net profit.
They are IndusInd Bank Ltd (64.69 per cent), Bandhan Bank Ltd (55.43 per cent), Kotak Mahindra Bank Ltd (14.85 per cent) and Axis Bank Ltd (7.27 per cent).
State Bank of India tops the list of profit makers with a net profit of ₹80,032 crore.
HDFC Bank Ltd, the most valued Indian bank in terms of market capitalisation, comes second with ₹74,671 crore, followed by ICICI Bank Ltd (₹50,147 crore), Axis Bank (₹24,457 crore) and Bank of Baroda (₹20,021 crore).
Operating Profit, Provisioning Trends
When it comes to operating profit, which has risen by 6.63 per cent for listed banks to ₹6.37 trillion, two banks have crossed the ₹1 trillion mark.
They are neck-and-neck -- HDFC Bank (₹1.1856 trillion) and SBI (₹1.1842 trillion).
These two banks together have more than one-third share of the entire banking industry's profit -- 37.17 per cent of operating profit and 39.22 per cent of net profit.
Indeed, many banks have pared their provisions for bad loans in FY26 -- still, overall provisioning by the industry was up 13.2 per cent to ₹1.27 trillion.
Barring SBI and Bank of Baroda, all PSBs have reduced their provisions; in the private sector, seven banks have done that.
Deposit and Credit Growth Dynamics
Finally, the deposit portfolio of all listed banks last year rose by 11.43 per cent but the credit portfolio moved up faster at 15.36 per cent.
The difference in the growth of deposits and credit is narrower in private banks (12.86 per cent vs 13.94 per cent) compared with the PSBs (11.43 per cent vs 15.36 per cent).
Among the large banks, SBI's deposit portfolio was up 11.03 per cent while the credit portfolio rose 17.16 per cent.
HDFC Bank, in contrast, has seen its deposit base growing at 14.39 per cent, higher than 12.12 per cent growth in credit portfolio.
At least four banks have recorded 20 per cent or more growth in deposits.
They are RBL Bank Ltd (25.3 per cent), City Union Bank Ltd (23.27 per cent). DCB Bank Ltd (20.91 per cent) and CSB Bank Ltd (20.3 per cent).
When it comes to credit growth, eight banks are in the 20 per cent-plus league.
They are City Union Bank (26.49 per cent), CSB Bank Ltd (26.47 per cent), Indian Overseas Bank (24.87 per cent), Dhanlaxmi Bank Ltd (24.74 per cent), RBL Bank (23.34 per cent), Bank of Maharashtra (22.03 percent) Tamilnad Mercantile Bank Ltd (20.78 per cent) and IDFC First Bank Ltd (20.28 per cent).
The asymmetry in deposit and credit growth is the biggest challenge before the Indian banking industry.
For every ₹100 deposit that a bank mobilises, it needs to keep ₹3 with the banking regulator in the form of cash reserve ratio on which it doesn't earn any interest.
Another ₹18 is used for buying government bonds (statutory liquidity ratio). This means, a bank is left with ₹79 for giving credit.
Add to this, its capital which can be used for giving loans. Most banks are facing a fund crunch. They need to find ways to attract deposits if they want to sustain credit growth.
March Quarter Earnings: NPAs and NIMs
Let's get back to the March quarter earnings. What do the key earnings metrics say?
When it comes to net non-performing assets (NPAs), IndusInd Bank tops the list with just 1 per cent net NPA.
Bandhan Bank follows it (97 basis points) and DCB Bank is the third on the list (89 basis points).
One basis point is a hundredth of a percentage point. Barring IndusInd Bank, all other listed banks have less than 1 per cent net NPAs.
In fact, 23 out of 31 of them have less than half a per cent net NPAs. When did we last see Indian banks in such pink of health?
IndusInd Bank has the highest gross NPAs too -- 3.43 per cent. It is followed by Bandhan Bank (3.27 per cent), Punjab National Bank (2.95 per cent), Union Bank of India (2.82 per cent), Central Bank of India (2.67 per cent), DCB Bank (2.45 per cent), IDBI Bank (2.32 per cent) and Uco Bank (2.17 per cent). No other listed bank has 2 per cent gross NPAs.
Another important metric which plays a key role in a bank's profitability is net interest margin, or NIM, loosely the difference between a bank's cost of money and earnings from the borrowers.
Bandhan Bank enjoys the highest NIM (6.2 per cent), followed by IDFC First Bank (5.75 per cent).
Quite a few of the banks have seen their NIM shrinking year-on-year. For instance, ICICI Bank's NIM in the March quarter was 4.32 per cent, down from 4.41 per cent in the year-ago quarter.
The comparable figures for HDFC Bank are 3.38 per cent and 3.46 per cent; Axis Bank 3.62 per cent and 3.98 per cent; and Kotak Mahindra Bank 4.67 per cent and 4.97 per cent.
In the pack of PSBs, Bank of Maharashtra enjoys the highest NIM -- 3.91 per cent, down from 4.01 per cent.
Four other PSBs have at least 3 per cent NIM but each of them has seen a drop in this metric.
They are Indian Bank, Indian Overseas Bank, Central Bank of India and Uco Bank. SBI’s NIM dropped to 2.81 per cent from 3 per cent.
Of course, NIM by itself does not tell the full story. One bank can have a higher NIM, taking higher exposure in unsecured loans and piling up NPAs, while another can have a relatively low NIM but still make handsome profit because of lower credit costs.
CASA and Future Outlook
The current and savings accounts (CASA) help a bank keep the cost of money low.
Bank of Maharashtra has the highest CASA (52.51 per cent), followed by IDFC First Bank (49.8 per cent), Central Bank of India (47.3 per cent) and IDBI Bank (44.59 per cent).
The quartet of Kotak Mahindra Bank, ICICI Bank, Axis Bank and Indian Overseas Bank has at least 40 per cent CASA. SBI's CASA portfolio is 39.46 per cent and that of HDFC Bank, 34.1 per cent.
With the Reserve Bank of India opening up windows for dollars to flow in, banks may get a handle on tackling the fund crunch; the cost of money may also come down. This will help banks improve their NIM.
In sum, banks are in good health but there are challenges on two fronts.
One, they need funds to support credit growth and, two, cracks have started showing in certain segments of credit. The credit cost may not remain as benign as it is now.
Tamal Bandyopadhyay is a senior advisor to Jana Small Finance Bank Ltd. His latest book is Roller Coaster: An Affair with Banking.
Disclaimer: These are Tamal Bandyopadhyay's personal views.
Feature Presentation: Rajesh Alva/Rediff
