Indian Banks' RoA Set to Fall to 1.15-1.2% This Fiscal: Crisil

India's banking sector is bracing for a profit squeeze as return on assets (RoA) is expected to decline to 1.15–1.2% in the fiscal year ending March 2025. This marks a notable drop from the higher profitability levels witnessed in recent years, according to credit ratings agency Crisil.

The contraction stems from two primary factors: shrinking treasury gains and rising provisioning requirements. Both pressures are eroding the bottom line across public and private sector banks.

Treasury Windfall Drying Up

Indian banks have enjoyed substantial treasury income over the past few years, primarily from unrealised gains on government securities and liquid investments. During periods of falling interest rates, bond valuations surged, delivering easy profits to bank balance sheets.

However, as interest rates stabilise and the Reserve Bank of India (RBI) shifts its policy stance toward calibration, these windfall gains are thinning. Banks can no longer rely on treasury operations to pad their earnings. This directly impacts RoA, which measures net profit against total assets.

The depletion of treasury gains forces banks to depend more heavily on core income streams—primarily net interest income from lending operations and fee-based services.

Provisioning Costs Climb

Simultaneously, banks are setting aside larger reserves against potential loan losses. Provisioning expenses have climbed due to rising delinquencies in certain loan segments, stricter regulatory norms on asset classification, and a cautious approach to balance-sheet management amid economic uncertainty.

While higher provisioning strengthens bank resilience and protects against future credit shocks, it directly reduces net profit in the current period. This double whammy—lower treasury income and higher provisioning—is compressing RoA across the sector.

What 1.15–1.2% RoA Means

A RoA of 1.15–1.2% represents a meaningful step down from recent highs. This compression is sector-wide, though the impact varies by institution depending on treasury positioning, loan portfolio quality, and operational efficiency.

Public-sector banks and private banks alike are feeling the pinch. Banks with diversified revenue streams—including robust fee income from wealth management, insurance distribution, and digital services—may demonstrate relative resilience.

Crisil's assessment suggests that banks will need to compensate through stronger net interest margins (NIM), improved operating efficiency, and disciplined cost management. Banks are focusing on technology-driven productivity gains, automation of lending processes, and digital customer acquisition to improve cost-to-income ratios.

Investor and Depositor Implications

Lower profitability may constrain dividend payouts, particularly for public-sector banks that regularly distribute dividends to the government. Investors should watch for changes in dividend policies and capital allocation strategies.

Weaker earnings growth may also slow internal capital generation, potentially limiting lending expansion capacity. However, most major banks maintain comfortable capital adequacy buffers above regulatory minimums, providing headroom for growth.

Despite profitability pressures, deposit mobilisation and credit growth remain strategic priorities. Banks are pursuing aggressive liability management and targeting high-yielding segments like retail loans, mortgages, and small business lending to offset margin pressures.

The Road Ahead

The banking sector's outlook depends on several variables. Stabilisation in the interest rate cycle, sustained deposit growth, and moderation in non-performing asset (NPA) ratios would provide relief. Additionally, growth in fee-based income from transaction banking, advisory services, and digital products could supplement traditional interest income.

A RoA of 1.15–1.2% is not alarming by historical standards—it signals a return to normalcy after years of exceptional profitability driven by favourable external conditions. The sector's ability to navigate this transition will depend on sustainable improvements in core operational metrics, disciplined risk management, and strategic focus on profitable growth segments.

Based on reports from Google News — Banking India.