Banking Central | Lessons from Chinese meltdown for Indian banks

A quiet crisis is gripping the China banking sector

The latest talk in global banking circles is the slowdown that is quietly evolving in Chinese banking industry. This is  marked by a 7.7 per cent decline in combined profits of commercial banks to 1.2 trillion yuan in the first half of 2025. Essentially, this shows the weak points in inherent in large-scale financial systems amid economic headwinds.

What exactly is the issue? This is the first such contraction since the pandemic-induced slump in 2020, primarily driven by escalating loan losses and a record-low net interest margin of 1.42 per cent, far below the 1.8 per cent threshold for sustainable profitability.

Major lenders like the Industrial and Commercial Bank of China reported a 1.4 per cent drop in net profit to 164.43 billion yuan, underscoring the pressures from a sluggish property market, weak loan demand, and repeated interest rate cuts.

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And the lessons for India? For Indian banks, which have enjoyed relative stability with robust growth in recent years, this scenario holds significant implications, particularly as global trade tensions and domestic economic shifts could amplify similar risks.

India's banking landscape, while distinct, shares some parallels with China's, especially in exposure to credit cycles and non-performing assets. As of March 2025, the Reserve Bank of India reported that the non-performing loans ratio for Indian banks stood at around 2.6 per cent, slightly higher than China's 1.5 per cent at the end of 2024, though both nations grapple with asset quality amid slowing growth.

In the first half of 2025-26, Indian banks witnessed a moderation in credit expansion, with industrial credit growth dipping to 7.6 per cent in June, down from double-digit figures the previous year, according to RBI data. Overall bank credit growth slowed to 9.9 per cent, reflecting cautious lending amid rising frauds—around 18,461 cases reported in H1 FY25, involving an eightfold jump in amounts to substantial figures.

Public sector banks, however, showed resilience with net profits reaching approximately Rs 85,526 crore in H1 2024-25, building on a rebound in credit growth to 11.1 per cent by January 2025. Private banks posted an 8 per cent year-on-year profit after tax growth, driven by lower provisions, though the sector as a whole faced headwinds from interest rate reductions, mirroring China's margin squeeze.

What’s the key takeaway? China's profit slump, exacerbated by a property crisis and economic slowdown projected at 4 per cent growth in 2025, highlights the dangers of over-reliance on specific sectors like real estate or infrastructure.

In India, where infrastructure and retail lending dominate, a similar deceleration could erode net interest margins, especially if the RBI's rate cuts—such as the shift to an 'accommodative' stance in April 2025—amid persisting growth concerns.

This could strain profitability, with analysts warning of a broader Asian banking profit decline due to narrowing margins and weak loan demand. Moreover, escalating trade wars, might indirectly impact Indian lenders through reduced exports and currency volatility, given India's integration into global supply chains.

If unchecked, this could lead to higher non-performing assets, particularly in export-oriented industries, potentially reversing the hard-won improvements in Indian banks' asset quality since the 2018 regulatory tightening.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers)