Bad loan provisions increased in March qtr amid microfin stress

Synopsis

Loan loss provisioning by banks, especially private sector banks, increased in the March 2025 quarter due to higher slippages and asset quality pressure in microfinance loans. NPA provisioning rose sequentially and year-on-year, with 22 banks reporting an increase. Stress in the microfinance portfolio is expected to continue, potentially leading to further slippages in the coming quarters.

ET Intelligence Group: Loan loss provisioning by banks increased sequentially and year-on-year in the March 2025 quarter, led by the private sector banks, which reported higher fresh slippages amid pressure on the asset quality of microfinance loans. For a sample of 29 banks, provisioning towards non-performing assets (NPA) increased by 8.3% sequentially to ₹25,242.9 crore after reporting a drop in the previous two quarters. On a year-on-year basis, it rose by 9.2%, a second consecutive quarter of increase.

The NPA provisioning has gradually inched up after hitting a low of ₹18,169.5 crore in the March 2023 quarter. However, it continues to remain below the level of ₹30,000 crore seen three Syears ago. The stress in the microfinance portfolio is likely to persist for the next few quarters, which may, in turn, result in fresh slippages.

"The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated while the stress in micro-finance segment still persist," stated IDBI Capital in a sector report.

In the total sample, 22 banks reported a year-on-year increase in the loan loss provisioning, the highest number in at least 13 quarters. The NPA provisioning by private sector banks increased by 26.4% year-on-year to ₹10,066 crore.

For the public sector banks (PSBs), it remained flat helped by a reversal of ₹2,759.4 crore of provision by IDBI bank during the March quarter. "Fresh slippages continue to remain elevated for the banks amid sustained stress in the MFI business. With the new MFIN guardrails being implemented in H1FY26, the growth shall experience a hiccup, while asset quality is likely to improve," mentioned Motilal Oswal Financial Services in a report. The brokerage expects credit cost to remain elevated in the first half of the current fiscal year and expects moderation in the second half.

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