Loan Growth Picks Up In India, But Private Banks To Likely Win Profit Race, Says S&P Report

Indian banks reported solid profits for the quarter ending March 31, 2025, but the growth in loans was slower compared to the same quarter last year. However, with better liquidity and reduced interest rates, banks can anticipate an upsurge in credit demand, and private sector banks are poised to benefit more from this growth than public sector banks, according to a recent S&P Global Market Intelligence report.

All six of India’s largest private sector and public sector banks witnessed growth in annual net profit. India’s largest bank, the State Bank of India, increased its profit by 16.1 per cent to Rs 70,900 crore, while HDFC Bank’s profit increased by 10.7 per cent. The loan books of the banks increased by 11.29 per cent on average, less than the growth rate of 21.18 per cent last year.

Loan Growth to Recover

According to the report, the growth in loans is likely to accelerate in the next year, with the average loan growth at systemic banks likely to reach more than 12 per cent this fiscal (FY 25-26), and up to 13 per cent next year. India’s GDP growth was 6.5 per cent during FY 2025 from 9.2 per cent a year earlier. This dip in growth hit both business and personal borrowing. However, things could improve with the Reserve Bank of India (RBI) stepping up efforts to improve lending, the report added. 

RBI Support Helps Improve Liquidity

Also, to facilitate credit growth, the RBI lowered the cash reserve ratio (CRR) by 50 basis points (bps)—25 bps each in February and April this year, and reversed higher risk weights on some loans. In addition, the RBI provided liquidity to the system using multiple tools, such as open market operations and foreign exchange swaps. The RBI also mentioned in its April 2025 bulletin that roughly Rs 6.9 trillion were infused into the system through these actions.

Deposit Costs Remain a Challenge

The report mentioned that though demand for credit is expected to increase, banks are still under pressure due to high deposit rates. To attract customers, most banks increased interest rates on term deposits. However, hit the public sector banks more, which are paying higher deposit rates than private sector banks.

High cost of deposits lowers the banks’ margins, and in this scenario, private banks are likely to perform better next year.

Private Banks Leading in Profit Expectations

The report added that SBI’s net profit is likely to decline by 3.1 per cent to about Rs 68,700 crore, while HDFC Bank’s profit is likely to increase by 9.5 per cent to more than Rs 73,700 crore.

One of the reasons is that public sector banks had benefited in previous years from huge recoveries on bad loans, which may not be as high this time, thus resulting in increased credit costs and reduced profits this year, the report said.

Private Banks Have a Stronger Retail Reach

Private sector banks are also better equipped to cater to retail customers and small business enterprises that are likely to drive credit demand once the economy picks up. As there are more digital services, greater outreach in cities, and improved customer experience, private banks can pull more borrowers. This puts them in a great position compared with public banks, which might still be oriented towards corporate or government-linked lending, the report said.

Outlook for the Banking Industry

On an overall basis, the outlook for banks in India is favourable, with hopes of picking up loan growth and maintaining asset quality. However, within the industry, private banks will likely have a better growth in terms of profit due to a variety of factors, such as robust retail franchise, lower funding cost, and greater efficiency to capture a larger proportion of increased demand for credit.

With RBI further easing policy and providing liquidity support, the coming quarters will be of pivotal importance in demonstrating how various banks react to these developments. While the public banks are not yet out of the running, private lenders are better placed to expand more rapidly.