Moneycontrol Pro Panorama | Playing safe in a stormy season

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Hard numbers never lie.

The Q1 FY26 earnings from India’s private banks—giants like HDFC Bank and smaller players like Credit Access Grameen—signal one thing: Caution is king.

As I wrote here and here , banks are fortifying their balance sheets, setting aside hefty provisions, and slowing loan growth to navigate a tricky economic landscape.

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Stubborn inflation, a global slowdown, and shifting deposit trends are keeping bankers awake at night.

HDFC Bank, the sector’s heavyweight, saw its consolidated Q1 net profit dip 1.3 percent to Rs 16,258 crore, despite a Rs 9,128 crore boost from its subsidiary HDB Financial Services’ IPO. The bank parked a massive Rs 14,442 crore in provisions, including Rs 9,000 crore as a buffer against potential bad loans, especially in retail and unsecured lending.

This sends a clear message: Growth can wait, but protecting the balance sheet can’t. HDFC Bank’s net interest income—the money earned from loans after paying for deposits—grew a modest 5.4 percent to Rs 31,438 crore, falling short of expectations.

Net Interest Margin (NIM), the gap between interest earned and interest paid, shrank to 3.35 percent from 3.46 percent in Q4 FY25, as savers shifted to costlier term deposits. HDFC Bank’s low-cost current and savings accounts (CASA) dropped to 33.9 percent from 38.2 percent a year ago, reflecting a broader trend.

Other private banks show similar caution, with varied outcomes. ICICI Bank stands out, posting a robust 15.5 percent profit rise to Rs 12,768 crore, driven by a 10.6 percent jump in interest income and tight cost control.

YES Bank, bouncing back from its turnaround, reported a 59 percent profit surge to Rs 801 crore, with stable bad loans and better funding costs.

Smaller banks, however, faced tougher times. AU Small Finance Bank’s profit grew 15.6 percent, but its margins took a hit from rising deposit costs. South Indian Bank’s 45.9 percent profit jump came with similar pressures.

These mixed results highlight a sector navigating uneven ground, with bigger banks better equipped to handle the storm. The RBI’s moves in April and June—cutting the repo rate by 50 basis points and the cash reserve ratio by 100 basis points—have pumped Rs 2 lakh crore into the system, easing pressure on deposit costs.

This could stabilise margins by late FY26 as term deposits reprice, but it’s not a fix-all. Loan yields are falling, and, as my colleague Aparna Iyer wrote in this piece, the industry’s CASA ratio has slipped to 38 percent from 43 percent two years ago.

Savers, lured by higher fixed deposit rates after earlier RBI rate hikes, have moved funds from CASA to term deposits or even to mutual funds and stocks. Low urban wage growth isn’t helping, raising a red flag: Is this deposit slowdown a short-term blip or a deeper, structural issue?

Public sector banks, losing just 1.32 percentage points in CASA compared to private banks’ 5.8 points, are gaining ground. Seamless online banking has made depositors less loyal, challenging the old belief that CASA funds are sticky and putting private banks on the back foot.

The microfinance sector sounds a louder warning. CreditAccess Grameen, India’s largest microlender, saw its Q1 profit crash 84.9 percent to Rs 60.2 crore, hit by Rs 571.9 crore in credit costs to cover potential defaults.

Bad loans, at 4.70 percent, reflect the struggles of rural borrowers grappling with inflation, erratic monsoons, and post-pandemic stress. Despite operational growth—21.9 percent higher disbursements and a 134.1 percent surge in retail finance—these numbers scream caution.

Microfinance’s focus on low-income borrowers makes it vulnerable, and aggressive lending without tight risk checks could spell trouble. These woes are a wake-up call for private banks, which are wisely doubling down on provisions and capital to avoid similar pitfalls.

So, what lies ahead?

As I already explained, the road is bumpy, but private banks’ cautious playbook gives them a fighting chance.

If low-cost deposit growth stays weak, banks will struggle to fund loans without hurting profits or passing higher costs to borrowers, slowing credit growth, and weakening the RBI’s economic steering. Smaller banks, with weaker deposit bases, face tougher odds.

Investing insights from our research team

GNG Electronics IPO: Is it a good value proposition?

Zensar Q1 FY26: A quarter of good execution

Mahindra Finance’s re-rating hinges on diversification strategy, steady credit cost

Indiqube IPO: Is it worth a look at the offer price?

PNB Housing Finance: Growth rebound story at a reasonable valuation

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A cavity emerges in Colgate’s earnings

Chart of the Day | Insurance industry hits the brakes as motor, health segments lose steam

Seal on India-UK FTA — Sending out the right cues at the right time?

Slowing sales apart, debt spike from Camso buyout punctures Ceat’s profit prospects

UBS’s forex fumble is a sign of things to come (republished from the FT)