Indian banks in a squeeze as interest rates soar: S&P Global

The Indian banking sector is undergoing pressure, weighted by slowed growth in loans amid high interest rates, according to a report by S&P Global Market Intelligence.
The report estimated that loan growth across six of India’s largest banks, including private and state-owned, will plunge to 12.3 per cent in the fiscal year ending 31 March 2025, marking a sharp decline from the 22.5 per cent growth recorded in the previous year.
“Indian banks face margin pressures as loan growth slows amid high interest rates… Net interest margins at most lenders are expected to edge lower, the estimates show. Weaker NIMs are expected as deposit rates catch up and monetary easing looms,” the report stated.
It attributed the expected decline in margins to rising deposit rates and the likelihood of monetary easing.
Despite the slowdown in lending, Indian banks continue to post higher net profits, albeit at a more modest pace. To adapt, many lenders have scaled back consumer loans and shifted focus to mobilising retail deposits, strengthening their balance sheets in the process.
The Reserve Bank of India (RBI) has kept its benchmark interest rates high, even as central banks in the US and Europe began easing their monetary policies in 2024.
While the RBI remains committed to controlling inflation, the report suggested that it has allowed the rupee to depreciate as a de-facto easing measure. Since 1 November 2024, the rupee has weakened by 2.8 per cent, recently touching an all-time low.
To curb excessive lending to riskier borrowers, the RBI raised risk weights on unsecured loans in November 2024 by 25 percentage points. The move affected personal loans, credit card debt, and lending to non-banking financial companies (NBFCs).
Among key lenders, State Bank of India (SBI) is expected to report a 5.6 per cent rise in net profit to Rs 701.16 billion for the fiscal year ending 31 March 2025, against Rs 663.79 billion reported in the corresponding quarter in the previous year.
Meanwhile, HDFC Bank, country’s largest lender by market capitalisation, saw its gross advances grow by just 3 per cent on an annual basis, in the quarter ending 31 December 2024, while deposits rose by 16 per cent.
On a positive note, bad loan ratios in Indian banks have significantly improved.
According to the RBI’s December 2024 Financial Stability Report, the gross non-performing assets (GNPA) ratio of scheduled commercial banks dropped to 2.6 per cent in September 2024, the lowest in years. This improvement was driven by lower defaults, higher write-offs, and steady credit demand.