Stories
Indian Banks Hit Structural Ceiling As Rising Costs And Regulations Squeeze Profitability
- •Net profit growth of scheduled commercial banks moderated significantly alongside a compression in net interest margins due to rising funding costs.
- •Credit demand is currently outpacing deposit growth, forcing banks to aggressively tap expensive wholesale funding through Certificates of Deposit and bulk deposits.
- •Regulatory interventions like increased risk weights on unsecured consumer credit and caps on insurance commissions are suppressing asset yields and fee income.
- •Mandatory Priority Sector Lending targets and high government securities holdings tie up a large portion of bank balance sheets, limiting operational flexibility.
Key Questions Answered
Indian commercial banks face profit compression due to rising deposit costs, a structural funding gap where credit growth outpaces deposits, higher regulatory risk weights on unsecured retail loans, and stricter caps on third-party fee income like insurance commissions.
The RBI raised risk weights on specified unsecured consumer credit by 25 percentage points to 125% and on credit-card receivables to 150%, forcing lenders to allocate more capital and compressing the return on equity for those high-yielding segments.
Corporate insolvency resolutions face severe delays, with the average resolution time stretching to 603 days by September 2025 against the 330-day statutory timeline, leaving creditors to recover only 31.41% of their admitted claims by March 2026.
