Private banks stumble on agriculture, microfinance slippages in Q3

Credit cost for most of the lenders increased due to higher provisions, mainly for unsecured retail loans

Elevated slippages in agriculture and microfinance portfolios impacted the profitability of private banks during the October-December quarter (Q3) of 2024-25, leading to a sequential decline in net profits. Margins also came under pressure due to these higher slippages. 

The net profit of 12 private banks rose 7.4 per cent year-on-year (Y-o-Y) to Rs 42,550 crore but fell 1.4 per cent quarter-on-quarter (Q-o-Q). 

“Increased stress in agriculture and microfinance portfolios, slower growth, and higher provisions weighed on bank profitability this quarter. However, the stress in microfinance is expected to normalise by the fourth quarter,” said Anand Dama, senior analyst of BFSI (research) at Emkay Global Financial Services. 

Provisions for these lenders grew 16.1 per cent Y-o-Y to Rs 10,552 crore, with a Q-o-Q rise of 1.8 per cent. Gross non-performing assets (NPAs) increased 2.2 per cent Y-o-Y to Rs 1.14 trillion and 3 per cent sequentially. 

“Apart from elevated credit costs, most banks reported higher slippages, primarily from the microfinance segment, leading to increased interest reversals. This has, to some extent, weighed on bank margins during the quarter,” said Dnyanada Vaidya, research analyst at Axis Securities. 

 

Credit costs rose for most lenders due to higher provisions, particularly for unsecured retail loans. While larger private banks faced seasonal slippages in agri portfolios, mid-sized banks saw slippages driven by unsecured retail loans. Axis Bank, Kotak Mahindra Bank, and RBL Bank, which have announced their Q3 earnings, reported a rise in slippages to NPAs in their credit card and microfinance portfolios. These banks expect normalisation in these segments by Q2FY26. HDFC Bank and ICICI Bank saw increased agricultural and Kisan Credit Card (KCC) portfolio slippages. 

“HDFC Bank reported higher slippages Q-o-Q at Rs 88 billion (1.4 per cent of loans), mainly due to seasonal stress in the KCC portfolio. This led to a slight increase in the gross NPA/net NPA ratio by 6 basis points Q-o-Q to 1.42 per cent. Excluding the agriculture portfolio, the gross NPA ratio was largely flat at 1.2 per cent, reflecting resilience in its retail portfolio as the bank has avoided growing its unsecured loan book in recent years,” Emkay analysts observed. 

Net interest margins (NIMs) were muted for most banks and are expected to remain range-bound or contract due to rising funding costs and slower credit growth. 

“The cost of funds is likely to stabilise at current levels. We expect NIMs for most banks to remain stable,” Vaidya added. 

Credit growth also slowed during the quarter, particularly in the unsecured segment, amid growing asset quality concerns.  Advances from private banks rose 8.8 per cent Y-o-Y to Rs 63.5 trillion, while deposits increased 14.2 per cent Y-o-Y to Rs 69.58 trillion as of December 31, 2024. 

“Most private banks that have reported Q3 results saw a slowdown in credit growth momentum, especially in the unsecured segment. Asset quality challenges in this portfolio continued to keep credit costs elevated during the quarter, weighing on banks’ profitability,” Vaidya said.