Low non-performing assets (NPAs) and double-digit credit growth are expected to propel public sector banks' (PSBs) profits beyond the ₹1.5 lakh crore milestone in 2024-25.
PSBs recorded a 25% increase in net profit, rising to ₹85,520 crore in the first half of 2024-25, compared to ₹68,500 crore in H1 FY23. This trend is anticipated to continue in the second half of the financial year.
Public lenders achieved their highest-ever aggregate net profit of ₹1.41 lakh crore in 2023-24, driven by major improvements in asset quality, credit growth, capital adequacy ratios, and rising returns on assets.
The gross NPA ratio of PSBs has seen a remarkable decline, dropping to 3.12% in September 2024 from a peak of 14.58% in March 2018. This improvement reflects the effectiveness of targeted measures to address stress within the banking system.
Another indicator of PSBs' strengthened resilience is their Capital to Risk (Weighted) Assets Ratio (CRAR), which increased by 3.98% to 15.43% in September 2024, up from 11.45% in March 2015. This far exceeds the Reserve Bank of India’s (RBI) minimum requirement of 11.5%, underscoring the robust financial health of these institutions.
These improvements mark progress towards overcoming the twin balance sheet challenges faced in 2014-15. A turning point occurred in 2015 when the RBI initiated the Asset Quality Review (AQR) to identify and address hidden stress in banks, mandating the transparent recognition of NPAs.
This reclassification significantly increased reported NPAs, necessitating higher provisions, which temporarily constrained banks’ ability to lend.
However, with the implementation of the "4Rs" strategy—Recognition, Recapitalisation, Resolution, and Reform—PSBs regained their financial strength. Over the past three years, PSBs have significantly contributed to shareholder returns, paying total dividends of ₹61,964 crore.
The anticipated interest rate cut in the upcoming Monetary Policy Committee (MPC) meeting is expected to further boost credit demand.
"We expect deposit rates to decline with a lag, even if rate cuts commence from the upcoming MPC meeting, which could impact margins in the near-to-medium term. We remain vigilant regarding asset quality and anticipate a rise in credit costs by FY26," said ICRA Vice President Sachin Sachdeva.
Despite these challenges, banking sector profitability is expected to remain strong, with a return on assets of 1.1–1.2% in FY26, compared to 1.2–1.3% estimated for FY25. However, slower deposit growth compared to credit growth remains a challenge for banks, alongside increasing digital fraud risks.
The gap between credit and deposit growth for scheduled commercial banks (SCBs) has narrowed, with year-on-year growth in outstanding credit and deposits at 12.4% and 11.6%, respectively, as of 15 November 2024.
According to the RBI’s Report on Trend and Progress of Banking in India 2023-24, the CRAR of SCBs was 16.8% in September 2024, with all bank groups meeting regulatory requirements, including the Common Equity Tier 1 (CET1) ratio.
Asset quality also improved, with the gross NPA ratio declining to a 13-year low of 2.7% at end-March 2024 and further to 2.5% at end-September 2024. Banks’ profitability rose for the sixth consecutive year in 2023-24 and continued to grow in H1 FY25, with a return on assets of 1.4% and return on equity of 14.6%.
Meanwhile, concerns over the rise in digital fraud have been highlighted by Prime Minister Narendra Modi, who emphasised the need for caution against cybercrime, urging people to adopt the mantra of "stop, think, and act" when encountering scams.
During the first nine months of 2024, ₹11,333 crore was lost to cyber fraud. Many incidents resulted from social engineering attacks on customers, alongside an increase in the use of mule accounts to perpetrate fraud.
The RBI report emphasised the need for banks to strengthen customer onboarding and transaction monitoring systems to detect suspicious activity. Enhanced collaboration with law enforcement agencies (LEAs) is also critical to addressing systemic risks.
To combat fraud, the Reserve Bank, in partnership with LEAs and banks, is working to strengthen transaction monitoring systems and promote best practices. An AI/ML-based model, MuleHunter.AITM, developed by the Reserve Bank Innovation Hub (RBIH), is being piloted, with banks encouraged to adopt it to curb digital fraud effectively.
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