Banks may see some relief from recoveries in Q3, but the pain isn’t over yet

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26 Aug, 2025 12:21

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The worst of bad loans may be past, but analysts say that sticky assets — loans with a high possibility of turning bad— remain at elevated levels and that could take the shine off the earnings of banks in the third quarter.

Leading private sector bank ICICI Bank will announce its earnings on January 25, and HDFC Bank will do so on Jaunary 18. India’s largest lender State Bank of India (SBI) is yet to declare the date of its Q3 results.

NPA pressure may continue

A persisting slowdown in the economy would mean banks will continue to feel the pain of bad loans emerging from small and medium sized companies and farm loan portfolios, said Darpin Shah, an analyst at HDFC Securities. India’s GDP growth is likely to touch a 11-year low of 5 percent in FY20, while the nominal GDP growth is expected to be at 7.5 percent, a 42-year low. A slowing economy typically reflects the cash flows and capacity utilisation levels of corporations.

The farming sector, in particular, could turn out be a bigger headache for banks in the months ahead because of the massive loan waivers announced by state governments including Maharashtra. According to a recent research report from SBI, agriculture-related Non Performing Assets (NPAs), which are about Rs 1.1 lakh crore at present, could swell to Rs 4.7 lakh crore if one factors in the farm loan waivers.

Some relief likely

But there is some good news as well. Banks like SBI and ICICI are likely report substantial recoveries from a few major accounts including Essar Steel, Ruchi Soya, Prayagraj Power and Rattan India Power, analysts said. Banks may also benefit in their treasury earnings as as the decline in benchmark yields has been lesser compared to that in the second quarter, Shah of HDFC Securities said.

Private sector banks are likely to report better earnings as compared to their public sector counterparts. One reason is that state-run banks are still in the process of streamlining their operations after the mega merger exercise announced by Finance Minister, Nirmala Sitharaman. The other reason is that state-run banks don’t have enough strength in terms of capital and efficiency to compete with their private sector rivals. In one go, the government clubbed ten state-run banks into four. Opinion is still divided on whether this measure will benefit these entities significantly in terms of efficiency.

All eyes on management guidance

While some uptick on NPAs are already factored in by the investors, market will look for cues from the guidance of bank managements on fresh slippages, NPA recoveries and credit growth. So far this fiscal, credit growth for the banking industry has remain muted. Bank credit growth, as of December 20, 2019, stood at 7.1 percent at Rs 99.47 lakh crore, lower than previous year.

Much of the future growth will depend on individual banks’ ability to raise capital from the market. This is especially true for state-run banks, considering that government funding may not come next year on account of revenue shortfall.