Public sector banks continue to fare well on the asset quality front compared with private sector banks. While fresh NPAs were generated by PSU banks at an annualised rate of 1.2 per cent for the first nine months of 2023-24, it was 2 per cent for private sector banks.

Analysts at ICRA expect this trend to persist in 2024-25 with fresh NPA generation rate estimated at 1.5 per cent for public sector banks, while it is 2.2 per cent for private banks.

“Public sector banks have a relatively larger share of corporate loans and these have behaved well. The credit upgrades continue to outpace the downgrades, which reflects a very strong asset quality cycle for the corporate sector over the last couple of years.

“Public sector banks have benefitted from the upcycle in the corporate sector,” said Anil Gupta, senior vice-president and company group head - financial sector ratings, ICRA.

Private banks have a relatively larger share of retail lending, credit cards and unsecured lending compared with public sector banksRBI governor Shaktikanta Das in October had advised lenders to strengthen their internal surveillance mechanism to address buildup of risks, particularly on the retail side.

CD ratio rising

ICRA further flagged that the credit-to-deposit ratio for the banks is estimated to have increased to 78 per cent (excluding the merger of HDFC Limited) as on March 22, the highest since December 21, 2018 (77.9 per cent) and much higher than 75.7 per cent as on March 24, 2023, 71.9 per cent as of March 25, 2022.

With expectations of a rate cut towards the end of the fiscal year, with limited headroom to cut deposit and lending rates, net interest margins could come under pressure.

“With elevated CD ratio, the competition for deposit mobilisation is likely to remain high even during FY2025, which will limit the banks’ ability to cut their deposit and lending rates. Amid this, if the policy rates are cut, it will pose significant challenges to bank’s net interest margins,” said Sachin Sachdeva, vice president and sector head, ICRA.