Indian banks hit 1.4% ROA as profit pressure builds

The 2025 return on assets was the sector’s highest level in over a decade

Indian banks may not record further gains as net interest margins begin to fall, fee income weakens and operating costs rise.

There are also signs of stress in unsecured retail loans, including higher write-offs and more slippages, according to McKinsey & Co.’s “Indian banks: Navigating through the turbulence” report.

These issues could weigh on future returns, especially if credit growth continues to run ahead of deposit growth. That gap is already tightening liquidity across the banking system.

The pressure on net interest margins is one of the main concerns. Margins helped lift profitability in recent years, but they have started to decline. 

At the same time, banks are facing higher operating expenses and weaker non-interest income. Provisions have fallen from earlier levels, but any rise in bad loans could reverse some of those gains.

Indian banks have outperformed many of their global peers, helped by India’s strong economic growth. 

Since 2021, GDP has grown at an average annual rate of 9 to 12%, supporting credit expansion, deposit growth and stronger asset quality.

Banks have also benefited from the post-pandemic recovery, which lifted credit demand, improved profitability and pushed valuations higher.

But the outlook is becoming more difficult as pressure builds on profit margins and retail lending.

Indian banks recorded a return on assets of 1.4% in fiscal year 2025, their highest level in more than a decade. 

Asset quality also improved, with the gross non-performing assets ratio falling to 2.2%. 

The sector is also facing wider challenges. Competition is increasing from both established banks and new financial firms. 

Customers are demanding faster and more convenient digital services, whilst regulators and investors are paying closer attention to transparency, inclusion and environmental impact.

The report says Indian banks will need to look beyond headline profit numbers to judge their long-term performance. 

It points to five areas that matter: financial strength, industry position, customer experience, social and environmental impact, and operational resilience.

For now, Indian banks remain in a stronger position than they were a decade ago.
But the next phase of growth is likely to be harder, with profitability under pressure and fewer easy gains from falling bad loans.