Private sector banks continued to see a steady credit growth but faced headwinds in the form of tighter margins and elevated borrowing costs, the Reserve Bank of India's 2024-25 annual report, released on May 29, said.
While credit growth continued to remain in double-digit in FY25, public sector banks (PSBs) outpaced their private counterparts in expanding credit. Private banks saw pressure on profitability as lending spreads narrowed.
Private banks charged higher average spreads over the policy repo rate across most loan categories compared to public sector banks, the report said, citing a spread of 4.84 percentage points for MSME loans against 2.63 percentage points by public sector lenders. Similar trends were observed in housing, vehicle and education loans.
Deposit competition also intensified for private banks, pushing up the term deposit rates, as the lenders scrambled to mobilise funds, leading to a narrowing of net interest margins (NIMs).
Though not quantified specifically for private banks, the report said banks’ reliance on higher-cost term deposits to fund loan growth put pressure on profitability.
Private banks continued to focus on personal loans, especially housing and vehicle segments, with housing loans accounting for nearly half the segment's growth. However, overall personal loan growth slowed to 14 percent from 17.6 percent in the previous year.
Reliance on external benchmark-linked lending rates (EBLR) was significantly higher among PVBs, with 85.9 percent of their outstanding floating rate loans tied to EBLRs versus 44.6 percent for PSBs, improving rate transmission but exposing customers more directly to monetary policy changes, the report said.
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