Big turnaround story! Public sector banks led India’s banking sector to record-breaking profits in FY25, with industry earnings rising nearly 14-fold over a decade to Rs 3.71 lakh crore, driven by lending income, treasury gains and reduced provisions for non-performing assets.Government-owned banks demonstrated remarkable growth with a 26% increase in profits to Rs 1.83 lakh crore, closing in on private banks, which recorded a modest 7% growth to Rs 1.87 lakh crore, according to an ET analysis.State Bank of India emerged as the most profitable bank with net earnings of Rs 70,900 crore, with HDFC Bank following at Rs 67,347 crore, and ICICI Bank achieving Rs 47,227 crore in FY25. The overall private sector bank profits were affected by significant declines in earnings at IndusInd Bank and IDFC First Bank.The remarkable financial performance follows the cleanup initiative that began in 2015 with the asset quality review (AQR) under former central bank governor Raghuram Rajan. This led PSU banks to record substantial losses over three successive years, with bad loans exceeding 8% of advances in FY16.
Sharp Post-Covid Rebound
To support PSU banks’ growth, the government provided capital injection of Rs 3.15 lakh crore since the 2015 AQR, according to the recently published Economic Capital Framework report.Motilal Oswal Finance Services’ banking report has said: “Banks are prioritising asset quality over growth, with stricter credit filters, higher CIBIL score thresholds, and conservative underwriting—especially in retail segments… PSU banks’ disbursements remain modest while private players have gained share.”In fiscal year 2016, commercial banks collectively posted a net profit of Rs 24,854 crore, primarily attributed to the strong performance of private sector banks. Lenders then initiated a comprehensive balance sheet restructuring, prompted by regulatory guidance and supported by updated insolvency legislation designed to swiftly recover substantial funds locked in debt-laden assets.“The key driver of the impressive rise in profits is the stable credit growth in FY25 on top of the good growth in FY24,” said VK Vijayakumar, chief investment strategist, Geojit Investments. The aggregate net profit of all commercial banks stood at Rs 3.19 lakh crore in the previous year. “A major concern at the beginning of the year was deposits lagging credit growth. But as the year progressed, the deposit growth converged with credit growth,” he added.The AQR implementation resulted in enhanced recognition of non-performing loans and increased provisions. The subsequent introduction of the Insolvency and Bankruptcy Code strengthened banks’ recovery mechanisms and negotiating position with defaulters. According to IBBI statistics, creditors have recovered approximately Rs 3.9 lakh crore across 1,194 cases through March 2025.Regarding stressed assets, Subha Sri Narayanan, director, Crisil Ratings, says, “Gross non-performing assets (NPAs) have bottomed at 2.4% as of March 31, 2025, and are seen rangebound at 2.4-2.6% by March 2026. While corporate NPAs would remain low on strengthened risk management of banks, and robust balance sheets of corporates.”Discussing FY26 net interest margin (NIM) prospects, Vishal Narnolia, analyst, ICICI Direct, noted, “In the first half, NIMs are expected to decline around 15 bps as there is a strong probability of policy rate cut which the banks will have pass to EBLR-linked borrowers.” He indicated that deposit repricing in the second half should support margin recovery, with overall margins likely decreasing by approximately 10 bps in FY26.Most banks maintain NIMs—the gap between interest income and expense—between 3% and 4%. Vijayakumar of Geojit confirms the banking sector’s positive outlook.He cautioned that “However, there are some concerns arising out of rising delinquencies in unsecured loans, credit cards and stress in the microfinance segment which can moderate profit growth in FY26.”
