BankingSector – Strong Quarterly Earnings Reflect Lending Stability

BankingSector –  India’s banking industry reported a noticeable improvement in profitability during the third quarter, supported by higher core income, easing credit stress, and controlled funding costs. A recent study by the Systematix Group indicates that lenders maintained stable financial performance despite evolving interest rate conditions and competitive pressures in deposit mobilisation.

Core Income Drives Earnings Momentum

According to the report, growth in Net Interest Income played a central role in lifting overall earnings. Banks benefited from steady expansion in their loan portfolios, which contributed to stronger core operating income. At the same time, fee-based income improved during the quarter, providing an additional cushion to bottom lines.

The analysis observed that profit margins showed sequential improvement. However, it suggested that margins may stabilise within a defined range in the near term, as the benefits of lower funding costs gradually balance out changes in lending yields.

Asset Quality Trends Show Improvement

A key contributor to the quarter’s performance was a reduction in slippages — loans turning non-performing — alongside better recoveries. Lower stress in loan books helped strengthen balance sheets and reduce provisioning pressures.

The report highlighted that asset quality trends have been improving steadily. Particularly, slippages in unsecured lending segments showed signs of normalisation. Reduced stress in microfinance portfolios further supported this trend, helping banks maintain healthier credit metrics.

Advances Growth and Funding Costs in Focus

Looking ahead, profitability is expected to remain stable, supported by continued growth in advances. Analysts noted that an ongoing deposit repricing cycle has begun lowering interest expenses, which should help protect margins even if lending yields moderate.

The reduction in Cash Reserve Ratio requirements is also expected to provide incremental support to earnings, as it improves liquidity and allows banks to deploy funds more efficiently.

During the quarter, Yield on Advances declined across most banks, largely in line with expectations. However, this was offset by a faster reduction in the cost of deposits and borrowings. As term deposits are repriced at lower rates, funding costs have started to ease, helping safeguard net interest margins.

Impact of Monetary Policy Adjustments

The report stated that the full effect of the 25 basis point repo rate cut announced in December 2025 is likely to be reflected in fourth-quarter financial results. While lower benchmark rates could exert some pressure on margins, banks are expected to counterbalance part of that impact through continued repricing of existing term deposits.

This adjustment in funding costs may help moderate the adverse effects of softer lending yields, maintaining overall profitability at comfortable levels.

Deposit Growth Remains Competitive

Deposit growth during the quarter remained steady, although it continued to trail advances growth. This trend indicates relatively tighter liquidity conditions and sustained competition among lenders to attract retail and institutional deposits.

Banks are increasingly focusing on improving deposit mobilisation strategies to maintain balanced growth. The gap between deposit and loan growth reflects the sector’s effort to sustain credit expansion while managing liquidity prudently.

Stable Outlook for the Banking Industry

Overall, the banking sector appears to be on stable ground. Strong income growth, improving asset quality, and favourable cost trends have reinforced confidence in the industry’s financial resilience.

While interest rate movements and liquidity conditions will continue to influence short-term dynamics, the broader outlook remains constructive. With advances growth holding steady and funding costs gradually easing, banks are expected to maintain healthy profitability levels in the coming quarters.