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New Delhi, 11 June 2025  

Banking Sector

PROFITABILITY INCREASES

By Dhurjati Mukherjee 

The banking sector has been in good health. Most banks are earning high profits and attracting investors in the capital sector. This is reinforced by the fact that the Reserve Bank of India’s board approved a record surplus transfer to the central government of Rs 2.68 lakh crore for the accounting year 2024-25. This is higher than Rs 2.1 lakh crore that the central bank paid as dividend to the Centre in 2023-24and marginally higher than Rs 2.56 lakh crore dividend receipt that the government has been expecting from the RBI and public sector banks. 

The higher-than-expected pay-out will bring down rates with analysts expecting the yield on government bonds to come down further. According to Aditi Nayar, Chief Economist at ICRA, the RBI’s dividend exceeds Budget assumptions by around Rs 40,000-50,000 crore or 11-14 basis points of GDP. The government will obviously feel financially benefited and would be in a position to manage additional spending. 

The banking sector’s Q4 consolidated net profit crossed Rs 1 lakh crore for the first time. Public and private sector banks together posted a net profit of Rs 100,178 crore in Q4 of financial year F25, up 9 percent from Rs 91,829 crore in the year-ago quarter. This growth came despite a squeeze in net interest margins as lending rates fell, following RBI’s February rate cut while deposit costs stayed high. Lenders, however, offset the impact through treasury giants and recoveries from bad loans. 

Private sector banks posted a relatively modest 5.2 percent rise in net profit to Rs 50.877 crore from Rs 45.214 crore. Among PSUs, four banks -- SBI (40 percent), Bank of Baroda (10.8 percent), Canara Bank (10.3 percent) and Union Bank (10.1 percent) – contributed around 80 percent of the profits. However, SBI was the only PSU bank to report a decline with net profit falling 8 percent to Rs 19,941 crore. 

Another recent development has been an aggressive cut in repo rate by 0.5 percentage points, double than what was expected, and reduction in cash reserve ratio by one percentage point, a move that would go down well for the sector as also for borrowers. This third consecutive reduction is expected to provide a much-needed boost to real estate demand. Coming on the heels of a slight dip in sales during Q1 2025, the timing of this rate cut could help revive momentum in the real estate sector. Homebuyers are expected to benefit from an improved home loan affordability, particularly first-time buyers and those targeting affordable housing, as it is expected that banks would pass on the rate cut to consumers. 

Apart from loans becoming cheaper, statistics reveal that the share of bank deposits in major cities has risen to 53.2 percent in March 2025 from 50.9 percent in 2020 even as their share in bank credit declined to 58 percent from 63 percent during the same period last year. The move is seen as a progress towards a policy goal of equitable distribution of bank funds across regions. This is due to the movement of people and capital from metros to semi-urban areas. These regions have seen a rise in their share of deposits. As of March 2025, total individual deposits stood at Rs 234.5 lakh crore of which, metros accounted for Rs 124.8 lakh crore, urban centres Rs 49 lakh crore, semi-urban areas Rs 36.2 lakh crore and rural areas Rs 24.4 lakh crore. 

However, while all this augurs well for the sector, the amount of fraud in scheduled commercial banks has seen a sharp increase in 2024-25 to Rs 36,014 crore from Rs 12,230 crore in the previous fiscal, even as the number of frauds has seen a decline of 33.5 percent from a little over 36,000 in FY24 to 23,953 in FY25. Private sector banks lead in terms of the number of frauds, constituting 67.2 percent of frauds during the year.  According to RBI, the increase has mainly been attributed to “the removal of fraud classification in 122 cases amounting to Rs 18,674 crore reported during previous financial years and reporting afresh during the current fiscal after re-examination and ensuring compliance with the judgment of the apex court of March 27, 2023”. 

The Supreme Court had directed the banks to give time and offer a detailed explanation to the account holdersand also asked the RBI to issue new directives towards the same. It is understood that the RBI’s department of supervision plans to enhance liquidity stress tests for scheduled commercial banks through advanced cash flow analysis. This aims to assess banks’ ability to withstand extreme but plausible stress scenarios, ensuring they can meet obligations during crisis. As per banking industry officials, the threat landscape is rapidly evolving with fraud detection, particularly in the form of mule accounts, money laundering, QR-based frauds and digital lending becoming a priority. 

The health of the banking sector has been reflected in the recent RBI report. In fact, with higher profits and lower NPAs, banks would be in a better situation to lend, thereby helping entrepreneurs with financial resources. However, it needs to be stated here that while top and middle-level industrialists are getting adequate loans from banks and financial institutions, small and micro level entrepreneurs have great problems in arranging their financial needs. This aspect needs to be looked into. 

The only point of concern has been the increase in frauds which needs to be detected. Both the individual banks and the RBI must join hands to ensure that these numbers are brought down, and the common man does not suffer due to siphoning off their hard-earned money. Apart from this, the banking personnel should extend a helping hand to those not quite educated and unaware of banking rules and regulations, some of which are quite complicated. 

It goes without saying that a vibrant economy needs a strong banking system. Thus, for the sector to thrive, there should be no interference with its operations and loans should be sanctioned by professionals only on merit and not on political pressure. Already Mudra loans are reaching small traders and entrepreneurs, and this should be encouraged by public sector banks with the help and support from the government. 

Though the banking network has spread across the country, there should be special endeavour to bring people from the economically weaker sections to open accounts, specially in PSUs. As the economy emerges strong, a lot depends on the work of banks to help provide financial assistance to professionals and entrepreneurs.---INFA 

(Copyright, India News & Feature Alliance)