Private Sector Banks: Q2-25 Performance & Outlook
Results a mixed bag. Challenges in asset quality, sustaining NIMs, & navigating regulatory landscape. Prioritizing granular deposit growth, calibrating loan growth, & leveraging digital initiatives.
Table of Contents
Overall Performance in Q2 FY25: Mixed Bag
Analysis of Q2 FY25 Earnings
Loan Growth: Cautious Approach
Deposit Growth Strategies: Emphasis on retail
Asset Quality: Caution and vigilance
Credit Quality: Rising stress
Microfinance Businesses: Difficult Period
Sources
1. Overall Performance in Q2 FY25: Mixed Bag
1.1 TLDR
Insights from Q2-25 performance of top 5 private sector banks by market cap i.e. HDFC, ICICI, Axis, Kotak Mahindra & IndusInd Bank
The Q2 FY25 results reveal a mixed bag for the Indian banking sector.
While macroeconomic factors remain positive, banks face challenges in managing asset quality, sustaining NIMs, and navigating the evolving regulatory landscape.
Banks are adapting by prioritizing granular deposit growth, strategically calibrating loan growth, and leveraging digital initiatives to enhance their competitiveness.
1.2 Key Macroeconomic Observations:
Resilient Economic Activity: All banks acknowledge stable economic activity in Q2 FY25, driven by robust domestic consumption and investment demand. Government spending and capex also rebounded, contributing to the positive momentum. (IndusInd Bank)
RBI Stance Shift: The RBI's shift to a "Neutral" stance while maintaining the repo rate signals potential rate reductions in the future. This indicates increasing confidence in achieving the 4% inflation target. (IndusInd Bank)
Positive Growth Outlook: The banks maintain a positive outlook for India's growth story. They anticipate strong private consumption fueled by a promising agricultural outlook and sustained growth in the services sector. (IndusInd Bank)
1.3 Key Themes and Observations:
Asset Quality:
Mixed Performance: While some banks, like IndusInd Bank, experienced an uptick in slippages, primarily from the microfinance sector, others like HDFC Bank reported improved asset quality.
Microfinance Sector Stress: IndusInd Bank highlighted stress in the microfinance sector, leading to increased slippages. However, they emphasized their cautious approach, leading to lower customer indebtedness and strong performance compared to peers.
Prudent Provisioning: IndusInd Bank and Axis Bank opted for increased contingent provisions to strengthen their balance sheets amidst the challenging operating environment, specifically focusing on non-NPA assets.
Focus on Collections: IndusInd Bank actively focused on collections to manage asset quality.
Deposit Growth and Liquidity:
Strong Deposit Growth: Most banks reported robust deposit growth exceeding industry averages, driven by initiatives like IndusInd Bank's Project Triumph and HDFC Bank's expansive customer franchise.
Granular Deposit Focus: Banks are actively pursuing granular, retail-driven deposits, contributing to a stable deposit base and reducing reliance on bulk deposits.
High Liquidity: Banks maintain a high liquidity coverage ratio (LCR) due to strong deposit inflows and, in some cases, calibrated loan growth.
Loan Growth and NIM:
Calibrated Loan Growth: Several banks, including HDFC Bank and Axis Bank, adopted a calibrated approach to loan growth, prioritizing asset quality and risk management over aggressive expansion.
Focus on High-Yielding Segments: IndusInd Bank emphasized the importance of high-yielding segments like microfinance and unsecured loans for margin improvement.
NIM Pressure: Banks acknowledged pressure on net interest margins (NIM) due to factors like competitive pricing, lower contribution from high-yielding segments, and elevated liquidity levels.
Business Strategy and Digital Initiatives:
Granular Book Growth: Kotak Mahindra Bank highlighted their strategy to expand their granular book through corporate SME and mid-market segments.
Digital Traction: IndusInd Bank reported significant traction with its digital banking app, INDIE, demonstrating the increasing importance of digital channels.
Acquisition Strategy: Kotak Mahindra Bank showcased their successful "tuck-in" acquisition strategy with the integration of the Standard Chartered portfolio, expanding their affluent customer base.
Branch Expansion: HDFC Bank continued its branch expansion strategy, focusing on deeper penetration in existing markets and expanding reach into new areas.
Regulatory Landscape:
RBI Draft Circular Impact: Banks are actively assessing the potential impact of the RBI's draft circular on investments in subsidiaries, particularly concerning overlap in lending activities. They are preparing their feedback and evaluating strategic options.
2. Analysis of Q2 FY25 Earnings
Profitability Trends:
IndusInd Bank: Reported a Net Interest Income (NII) of Rs. 5,347 crores, representing a 5% year-on-year growth. However, the bank's Return on Assets (RoA) contracted to 1.00% due to a combination of factors, including slower asset growth, a reduction in loan yields stemming from the slowdown in Microfinance, and a deliberate push on deposit mobilisation. The bank management characterised this RoA impact as "transitory," expecting a return to their steady state RoA upon resuming growth in Microfinance.
Kotak Mahindra Bank: Achieved a consolidated profit after tax of Rs. 5,044 crores, marking a 13% increase year-on-year. The bank highlighted strong performance in their core businesses, with the banking, asset management, and insurance segments all recording impressive year-on-year growth. The bank also emphasised its robust capital adequacy at 22.6%.
HDFC Bank: The bank's CEO highlighted the bank's strong financial position, particularly its Rs. 740 book value per share, signifying a "strong fortress company and a strong fortress balance sheet." The transcript does not provide specific profit figures for Q2 FY25.
Axis Bank: Recorded a 9% year-on-year growth in operating profit, driven by healthy operating income and a moderation in operating expense growth. The bank's consolidated RoA improved to 1.92%, representing a 9 basis point increase year-on-year and a 22 basis point increase quarter-on-quarter. The bank's PAT grew by 18% year-on-year.
ICICI Bank: Reported a 14.5% year-on-year growth in profit after tax, reaching Rs. 117.46 billion. The bank's net interest income increased by 9.5% year-on-year to Rs. 200.48 billion. ICICI Bank also highlighted a robust capital position, with a CET-1 ratio of 15.96% and a total capital adequacy ratio of 16.66%.
Key Themes and Challenges:
Margin Pressure: Several banks, including IndusInd Bank and Axis Bank, faced pressure on their net interest margins (NIMs) due to factors like a shift towards lower-yielding assets, increased competition in the deposit market, and the impact of higher interest payouts on income tax refunds in the previous quarter.
Asset Quality Concerns: The transcripts highlight rising concerns about asset quality, particularly in the unsecured lending segment. Banks like IndusInd Bank and Kotak Mahindra Bank reported higher slippages in their Microfinance and credit card portfolios, respectively. Axis Bank also acknowledged industry-wide stress in Microfinance and took proactive measures to manage the risk in its credit card portfolio.
Deposit Growth and Liquidity Management: Banks are actively focusing on building a strong and granular deposit base to support their growth and manage liquidity in a volatile interest rate environment. HDFC Bank, for example, emphasised its strategy of reducing its loan-to-deposit ratio to enhance liquidity. ICICI Bank reported a 15.7% year-on-year growth in total deposits, highlighting their successful efforts in attracting deposits.
Strategies and Outlook:
Cautious Approach to Unsecured Lending: In response to the rising stress in unsecured lending, banks are adopting a more cautious approach to growth in these segments. This includes tightening underwriting standards, slowing down disbursements, and intensifying collection efforts.
Focus on Secured Assets: Several banks, including IndusInd Bank and Kotak Mahindra Bank, are prioritising growth in secured lending segments like home loans and business banking as a way to mitigate risk and maintain asset quality.
Prudent Risk Management and Provisioning: Banks are demonstrating prudence through proactive provisioning for potential future losses, building contingency buffers, and strengthening their risk management frameworks. For instance, both IndusInd Bank and Axis Bank made incremental additions to their non-NPA provisions during Q2 FY25.
Focus on Technology and Digital Initiatives: Banks are leveraging technology and digital initiatives to enhance efficiency, improve customer experience, and expand their reach. Kotak Mahindra Bank highlighted significant progress in its technology initiatives, particularly in developing a new mobile banking platform. Axis Bank emphasised its digital banking performance and the ongoing development of digital channels for corporate and business clients.
The Q2 FY25 earnings of these major Indian banks reveal a mixed picture. While some banks reported healthy profitability growth, others faced challenges related to margin pressure and asset quality concerns. However, there is a clear focus across the board on managing risk, strengthening balance sheets, and adapting to the evolving economic conditions. The banks are leveraging technology, prioritising secured lending, and tightening risk management practices to navigate the uncertainties and position themselves for sustainable growth in the future.
3. Loan Growth: Cautious Approach
Banks have adopted a cautious approach to loan growth, particularly in unsecured lending segments like microfinance and credit cards, due to concerns about asset quality and a challenging operating environment.
Here's a detailed discussion of the loan growth trajectory for each bank:
IndusInd Bank:
IndusInd Bank exhibited a sequential loan growth pick up from 1% to 3% QoQ, resulting in a 13% YoY growth rate.
The bank adopted a cautious approach towards loan growth, particularly in unsecured products like microfinance and credit cards, slowing down growth in these segments for the past few quarters.
The bank expressed comfort with its secured lending and Corporate franchise, experiencing industry-leading growth in its Vehicle business.
The bank expects retail disbursements to improve in the second half of the year, supported by seasonality.
Kotak Mahindra Bank:
Kotak Mahindra Bank achieved 18% YoY customer asset growth, primarily driven by wholesale banking and secured consumer advances.
The bank experienced muted growth in commercial banking due to a slowdown in the CV and tractor industries.
Similar to IndusInd Bank, Kotak Mahindra Bank restricted growth in the MFI space due to observed strain, a trend they expect to continue for the next few quarters.
The bank intends to manage asset yields and deposit rates to come out with appealing propositions and sustain growth.
HDFC Bank:
HDFC Bank exhibited an average asset under management growth of 11% YoY.
They stated their intention to grow slower than the system in FY25, at or around the system growth rate in FY26, and faster than the system in FY27.
The bank is aggressively bringing down its loan-to-deposit ratio (LDR) to reach the high 80s within two to three years.
HDFC Bank continues to focus on mortgages and non-mortgage retail loans, with 11.7% and 11% YoY growth respectively.
The bank maintains a cautious approach to larger ticket-size loans due to pricing concerns.
Axis Bank:
Axis Bank reported 11% YoY and 2% QoQ net advances growth.
Retail and SME loan segments saw strong growth at 15% and 16% YoY respectively.
The bank’s small business banking, SME, and mid-corporate loan portfolio grew 800 basis points in the last four years, reaching 22.2% of total loans.
There are concerns about asset quality deterioration and higher slippages, particularly in the unsecured lending segment.
Axis Bank is actively managing its deposit base through initiatives like Project Triumph to improve quality and strength, achieving 14% YoY deposit growth.
The bank is cautiously monitoring the performance of its unsecured loan portfolio and taking necessary actions to maintain portfolio quality.
Overall Trends:
A general trend of cautious loan growth among these banks due to concerns about asset quality, particularly in the unsecured lending space. The banks are focusing on:
Strengthening deposit franchises: They are emphasizing granular, retail-driven deposits to improve liquidity and manage funding costs.
Secured lending: They are prioritizing growth in secured loan segments like mortgages and vehicle finance, which are perceived as less risky.
Calibrated growth in unsecured segments: While still seeking opportunities in unsecured lending, they are closely monitoring risk and adjusting their strategies based on market conditions and portfolio performance.
4. Deposit Growth Strategies: Emphasis on retail
A common thread across these institutions is a strategic emphasis on retail deposits, driven by a need for stable, granular funding sources and a desire to reduce reliance on bulk deposits. Here's a breakdown of the key trends and strategies:
IndusInd Bank:
Healthy Retail Deposit Growth: IndusInd Bank reported a robust 16% year-on-year and 4% quarter-on-quarter growth in retail deposits. They incrementally added approximately Rs. 7,700 crores in retail deposits during Q2 FY25, exceeding the average of Rs. 4,400 crores added in the previous two quarters.
Increased Share of Retail Deposits: The bank's focus on retail deposit mobilization led to an improvement in the share of retail deposits as per Liquidity Coverage Ratio (LCR) from 43.7% in the previous quarter to 44.1% in Q2 FY25.
Focus on Affluent and NRI Segments: IndusInd Bank reported significant growth in its affluent and NRI deposit segments, growing at 19% and 37% year-on-year, respectively.
New Initiatives for Deposit Mobilization: The bank launched new initiatives like "Pioneer Private" for high-net-worth individuals and "Indus Care" for senior citizens to attract deposits from specific customer segments.
Kotak Mahindra Bank:
Overall Deposit Growth: Kotak Mahindra Bank reported a 16% year-on-year growth in average deposits, with a stable CASA ratio of 43.6%, which they consider industry-leading.
Focus on Premium Customer Acquisition: The bank is focusing on acquiring premium customers through bundled product offerings across savings, current accounts, and term deposits.
Emphasis on Granular Deposits: Kotak Mahindra Bank highlighted its commitment to growing granular deposits, particularly in savings accounts, ActivMoney (a fixed deposit product), and term deposits.
HDFC Bank:
Healthy Deposit Growth and Market Share Gains: HDFC Bank reported healthy deposit growth, exceeding the industry average of 10.5-11% and gaining market share between 50 to 70 basis points annually over the past three to five years.
Emphasis on Retail Deposits: Retail branches contributed significantly to the bank's deposit base, accounting for 84% of total deposits.
Focus on Granular Deposits: The bank prioritized attracting granular deposits, particularly retail-driven deposits with a lower runoff factor.
Strong Credit Growth in Savings Accounts: Despite a shift towards term deposits, the bank observed robust growth in savings account credits, indicating healthy customer engagement and a potential for further deposit growth.
Axis Bank:
Strong Deposit Growth: Axis Bank achieved 14% year-on-year deposit growth, outpacing the industry average. This growth was fuelled by a combination of branch expansion, particularly in rural areas, and focused initiatives like Project Triumph.
Project Triumph for Deposit Transformation: The bank is implementing Project Triumph, a bank-wide deposit transformation program, to improve the quality and strength of its deposit franchise.
Focus on New-to-Bank Savings Accounts: Axis Bank has seen positive trends in new-to-bank savings account acquisitions, with year-on-year growth in both account numbers and balances per account.
Emphasis on Salary Accounts: The bank's focus on acquiring new corporate salary accounts has contributed to its deposit growth and improved the quality of its CASA franchise.
Expansion of Burgundy Private: Axis Bank expanded its Burgundy Private wealth management offering to 15 new cities, tapping into the growth potential of affluent segments in tier 2 cities.
Key Observations:
Retail Deposit Focus: Across the board, banks are prioritising retail deposits to build a stable and granular funding base, which helps in managing liquidity and reducing reliance on volatile bulk deposits.
Targeted Segment Strategies: Banks are employing targeted strategies to attract deposits from specific segments like affluent customers, NRIs, and salaried individuals through tailored product offerings and focused marketing campaigns.
Leveraging Technology and Digital Channels: Several banks are leveraging technology and digital channels to enhance customer experience, streamline deposit account opening processes, and improve the efficiency of deposit mobilization efforts.
Competition for Deposits Remains Intense: Despite a potential for rate cuts in the future, competition for deposits remains intense. Banks are focusing on differentiating themselves through superior customer service, innovative product offerings, and enhanced digital capabilities to attract and retain depositors.
A banking landscape where competition for deposits remains fierce. The banks are employing diverse strategies to enhance their deposit base, with a clear emphasis on retail, granular deposits. How this landscape evolves in the context of shifting interest rate dynamics and evolving customer preferences will be an intriguing trend to monitor in the coming quarters.
5. Asset Quality: Caution and vigilance
The overarching theme is one of caution and vigilance, as banks navigate a challenging operating environment marked by elevated delinquencies in specific segments. Here's a breakdown of the asset quality landscape across these institutions:
IndusInd Bank:
Overall Stable Asset Quality: The bank maintained its focus on collections, resulting in a Gross Non-Performing Asset (GNPA) ratio of 2.11% and a Net NPA (NNPA) ratio of 0.64%. This indicates a degree of stability in the overall asset quality.
Microfinance Challenges: The bank experienced an increase in net slippages by Rs. 222 crores quarter-on-quarter, primarily attributed to the microfinance business. They acknowledge an industry-wide challenge in this segment and have taken a cautious stance on microfinance disbursements, prioritising collections.
Contingency Buffer: The bank created an additional contingent buffer as a prudent measure to address potential stress in the operating environment, particularly rising delinquencies in Microfinance and Credit Cards.
Focus on Granular Corporate Loans: IndusInd Bank's corporate loan book saw continued growth, led by granular mid and small corporates with a pristine asset quality in the diamond business.
Vehicle Finance Concerns: The bank acknowledged stress in the tractor and two-wheeler segments, leading them to slow down business in these areas.
Kotak Mahindra Bank:
Limited Disclosure on Asset Quality: The sources do not provide specific details about Kotak Mahindra Bank's overall asset quality metrics such as GNPA or NNPA ratios.
Focus on Secured Assets: The bank’s strategy emphasizes a focus on secured assets, indicated by strong growth in wholesale banking and secured consumer advances, with a reduction in their unsecured retail mix.
HDFC Bank:
Stable Asset Quality with Limited Improvement: HDFC Bank acknowledges the stability of their asset quality across the board but notes a limited improvement in NPA ratios. They attribute this to their foray into small and marginal farmer loans and expansion into deeper geographical segments, which bring different seasonality effects.
Axis Bank:
Stable Asset Quality: The bank emphasizes the stability of its asset quality, with GNPA declining both year-on-year and sequentially. However, they acknowledge a potential for worsening asset quality in some segments, particularly on the unsecured front.
Elevated Slippages in Unsecured Retail: Axis Bank observed higher slippages primarily originating from the unsecured retail segment, specifically in the credit card portfolio. They have implemented various portfolio actions, including tightening scores, curtailing spending limits, and focusing on vintage to address these concerns.
Microfinance Concerns: Axis Bank, like IndusInd Bank, expressed concerns about the performance of its microfinance portfolio due to industry-wide deterioration. The bank has implemented risk mitigation strategies and is closely monitoring the situation.
Key Takeaways:
Unsecured Lending Stress: The sources reveal heightened concerns regarding asset quality in unsecured lending, particularly microfinance and credit cards, across multiple banks. This is driven by factors such as over-leveraging in the market and changing customer behaviour.
Focus on Secured Assets: Banks are demonstrably shifting their focus towards secured lending segments like mortgages and vehicle finance to mitigate risk and maintain stable asset quality.
Proactive Risk Management: Banks are actively implementing various risk management measures, including tighter underwriting standards, portfolio monitoring, and prudent provisioning to address emerging asset quality challenges.
6. Credit Quality: Rising stress
The overall message is one of caution, with banks highlighting rising stress in certain lending segments, particularly unsecured loans. However, there's also a focus on proactive risk management and a strategic shift towards secured lending to maintain asset quality and navigate the evolving credit environment.
Here's a comprehensive discussion of the key credit quality trends and insights gleaned from the sources:
Rising Stress in Unsecured Lending
The most prominent theme emerging from the sources is the acknowledgement of increasing stress and rising delinquencies in unsecured lending segments. This concern is expressed by several banks, including IndusInd Bank, Kotak Mahindra Bank, and Axis Bank, all of which reported higher slippages or delinquencies in their unsecured portfolios.
IndusInd Bank pointed to its Microfinance business as the primary driver behind a significant rise in net slippages during Q2 FY25. Their 30-90 DPD book in Microfinance experienced a substantial increase of 2 percentage points, a clear indicator of worsening asset quality in that segment. The bank's management attributed this to factors like over-leveraging in the Microfinance sector, which they believe stems from a slowdown in the funding cycle.
Kotak Mahindra Bank reported that their credit card portfolio contributed 30-35% of their overall net slippages in Q2 FY25, highlighting a vulnerability in that segment.
Axis Bank observed an industry-wide deterioration in Microfinance portfolios, impacting their own comparatively small Microfinance book. The bank also saw signs of stress in their credit card portfolio, prompting them to take early actions, such as tightening credit scores and curtailing spending limits for certain customers.
Root Causes of Unsecured Lending Stress
Several factors contributing to the stress in unsecured lending are identified in the sources:
Over-Leveraging: IndusInd Bank explicitly attributed some of the stress in Microfinance to over-leveraging in the sector, stating that the situation is exacerbated by a constrained funding cycle.
Economic Slowdown and Rural Distress: While not explicitly stated in these sources, previous discussions on Microfinance performance often link rural economic distress and fluctuating agricultural incomes to repayment challenges. It's plausible that these factors played a role in the observed stress.
Indebtedness and Multiple Borrowings: Axis Bank highlighted the issue of increasing indebtedness among borrowers, noting an industry-wide trend of customers taking on multiple loans within short timeframes. This suggests that a portion of the stress stems from borrowers overextending themselves financially.
Proactive Risk Management Strategies
In response to the challenging credit environment, the banks are implementing various risk mitigation strategies to protect asset quality:
Cautious Growth in Unsecured Segments: Most of the banks expressed caution regarding growth in unsecured lending segments. IndusInd Bank significantly slowed down its Microfinance disbursements, while Kotak Mahindra Bank and Axis Bank also signalled a more conservative approach to unsecured lending.
Tighter Underwriting Standards: Banks are tightening their credit policies and underwriting standards to manage risk. This includes stricter scorecard cut-offs, more rigorous income verification, and a greater emphasis on assessing a borrower's overall debt burden.
Focus on Collections and Recovery: IndusInd Bank highlighted its efforts to strengthen collections by deploying more resources on the ground to engage with borrowers and improve recovery rates.
Proactive Provisioning: Both IndusInd Bank and Axis Bank proactively added to their non-NPA provisions during Q2 FY25 as a measure of prudence. This suggests a willingness to build buffers and anticipate potential future losses.
Strategic Shift Towards Secured Lending
Several of the banks indicated a strategic shift towards prioritising growth in secured lending segments as a way to mitigate risk in the current environment.
IndusInd Bank stated that they would prioritise growth in secured assets while being cautious on unsecured lending. Their home loan portfolio, for example, grew by 28% quarter-on-quarter, indicating a focus on this secured segment.
Kotak Mahindra Bank also emphasised a focus on secured assets. Their secured lending portfolio, including mortgages and business banking, grew by 6% quarter-on-quarter, driven by their focus on maintaining a robust and high-quality book in this segment.
Axis Bank while not explicitly stating a shift in strategy, highlighted their focus on building a strong base of granular deposits, which is crucial for supporting growth in secured lending.
The credit quality reflects a combination of rising concerns and proactive measures. Banks are acutely aware of the growing stress in unsecured lending and are implementing a range of risk mitigation strategies to address it. There's also a discernible strategic shift towards prioritising secured lending as a way to navigate the challenging environment and maintain asset quality. This cautious approach and emphasis on risk management underscore the banks' commitment to building resilience and protecting their balance sheets in the face of potential future economic uncertainties.
7. Microfinance Businesses: Difficult Period
There is a consensus that the Microfinance sector in India faced difficulties during this period. Here's a breakdown of the key observations and trends:
IndusInd Bank:
Significant Impact on Asset Quality: IndusInd Bank specifically identified its Microfinance business as the primary driver behind an increase in net slippages during Q2 FY25. The bank's 30-90 days past due (DPD) book in Microfinance saw a significant rise of 2.1 percentage points, indicating elevated delinquencies.
Cautious Approach to Disbursements: In response to these challenges, IndusInd Bank adopted a cautious approach to Microfinance disbursements, prioritising collections over new loan origination. This is reflected in their disbursement figures for Q1 (Rs. 8,500 crores) and Q2 (Rs. 7,050 crores), significantly lower than their average run rate of Rs. 12,000 - 13,000 crores.
Focus on Customer Acquisition: Despite the slowdown in disbursements, the bank maintained its focus on acquiring new Microfinance customers, while being cautious about individual customer exposure. This strategy is aimed at expanding their customer base while mitigating risk.
Diversification into Merchant Business: IndusInd Bank, through its subsidiary Bharat Financial Inclusion Limited (BFIL), has been actively diversifying its Microfinance business into merchant lending. The bank reported healthy growth in its merchant loan book, which reached Rs. 5,790 crores, up 18% year-on-year.
Kotak Mahindra Bank:
Challenges in Microfinance: Kotak Mahindra Bank acknowledged stress in the Microfinance segment due to over-leveraging in certain borrower segments and a slowdown in rural household incomes, leading to an increase in delinquencies.
Pullback in Disbursements: The bank stated they "pulled back a bit" in Microfinance disbursements and are carefully observing trends in this important business. This indicates a conservative approach in light of the sector's difficulties.
Axis Bank:
Industry-Wide Deterioration in Microfinance: Axis Bank noted an industry-wide deterioration in Microfinance portfolios, impacting their own small Microfinance book. The bank highlighted an increase in delinquency levels in this segment over recent periods.
Risk Mitigation Strategies: Axis Bank has implemented risk mitigation measures to manage its Microfinance exposure. These include avoiding areas prone to over-leveraging and maintaining a tight focus on regional exposure.
Key Takeaways:
Challenging Operating Environment: The Microfinance sector experienced difficulties during Q2 FY25, characterised by rising delinquencies and stress stemming from factors like over-leveraging and a slowdown in rural household incomes.
Cautious Approach by Banks: Banks are responding to these challenges with caution, evidenced by a slowdown in disbursements, tighter underwriting standards, and an increased focus on collections.
Diversification Efforts: Some banks, like IndusInd Bank, are actively diversifying their Microfinance operations into adjacent segments like merchant lending to mitigate concentration risk and seek new growth avenues.
Proactive Risk Management: Banks are increasingly employing proactive risk management strategies, including enhanced monitoring, regional exposure limits, and data analytics to identify and manage potential risks in their Microfinance portfolios.
The trends outlined suggest a challenging period for the Microfinance sector. While the long-term potential of this sector remains acknowledged by the banks, their near-term strategies are focused on navigating the current turbulence through caution, risk mitigation, and diversification.
8. Sources
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