Private banks show resilience while PSUs struggle with investor confidence
The Indian banking sector is moving through a critical phase. Global tensions, domestic economic shifts, and changing investor behavior are all influencing the performance of banking stocks. While some banks are managing to perform well, others are facing serious challenges. The future of banking stocks will depend on how these institutions adapt to a constantly changing economic environment.
Current Economic Situation
Recent global and regional developments have created uncertainty in financial markets. India’s economic growth forecast for 2025 has been lowered by major agencies to around 6.3%. The downgrade is due to reasons like geopolitical tension, global policy confusion, and a slow recovery in the global economy.
To tackle this situation, the Reserve Bank of India (RBI) has taken steps to support economic growth. The repo rate has been reduced to 6% to make borrowing cheaper. The RBI has also injected more money into the banking system through bond buying and other tools. These steps are meant to help banks lend more money and keep the economy running.
Private Sector Banks: Mixed Signals
Private banks have had mixed results in recent months.
Axis Bank has shown strength with its stock price rising by more than 3% in May. It has been trading above its key technical levels, which is a positive sign for traders.
ICICI Bank continues to show strong business growth, especially in retail and digital banking. Over the last several quarters, its earnings have been stable and healthy.
HDFC Bank, on the other hand, saw a small decline in its stock price. It remains one of the most valuable banks in the country, but it is under pressure due to slowing demand for loans and concerns over asset quality.
Kotak Mahindra Bank has shown moderate gains in May but is still trading below its 52-week high, reflecting a cautious investor outlook.
Public Sector Banks: Struggling to Recover
Public sector banks (PSBs) have not performed as well as private banks in 2025. Many of them have seen their stock prices fall by as much as 40% since the start of the year. Despite decent earnings in the last quarter, investor confidence remains weak. Analysts suggest that only select PSBs like State Bank of India (SBI) and Bank of Baroda may be worth watching, as they have strong fundamentals and government backing.
These banks may benefit if the government introduces new reforms or capital support. However, most PSBs still face issues related to non-performing loans, low profitability, and weak operational efficiency.
Foreign Investment and Strategic Deals
Foreign investors have once again started showing interest in Indian banking stocks. In April 2025 alone, foreign portfolio investors (FPIs) put in over ₹18,400 crore into financial stocks. This investment helped banking indexes rise by over 4% in that month.
One major event was Japan’s Sumitomo Mitsui Banking Corporation (SMBC) agreeing to buy a 20% stake in Yes Bank. The deal is worth more than ₹13,000 crore and is one of the biggest foreign deals in India’s financial sector. SMBC will be buying the stake from existing Indian banks, including SBI. This kind of deal shows confidence in the long-term potential of Indian banks.
Credit Growth and Bad Loans
Banks are expecting credit growth of 12–13% in the financial year 2025–26. This will likely be led by demand from retail customers and the services sector. However, there is growing concern over defaults on small loans, especially personal loans, as many borrowers are still struggling with income recovery.
In the last quarter of 2024, the gross non-performing asset (NPA) ratios for private banks went up slightly. Some private banks had NPAs as high as 4.7%, while others managed to keep it below 1.5%. Keeping NPAs under control will be key to maintaining investor trust.
Some banks, like Indian Bank and Karur Vysya Bank, have performed well despite the economic pressure. Indian Bank saw a 38% increase in profit before tax in the last quarter, and Karur Vysya Bank reported a very low net NPA of just 0.2%, reflecting careful lending practices.
RBI’s Role and Policy Support
The RBI continues to play an important role in supporting the banking system. By reducing interest rates and adding liquidity to the market, the central bank is helping banks continue their lending activities.
However, this also has a downside. Analysts believe that the net interest margins (NIMs) of banks — the profit banks make on loans — may shrink slightly due to lower interest rates. This means banks will need to find other ways to protect their profits, such as increasing the volume of loans or improving operational efficiency.
What to Expect Ahead
The performance of Indian banking stocks will depend on several key factors:
Economic Recovery: A steady improvement in GDP will drive credit growth and reduce defaults.
Loan Quality: Banks will need to carefully monitor loans to avoid high NPAs. Prudent lending will be more important than ever.
RBI Support: Continued policy support in the form of low interest rates and liquidity will be helpful, especially for banks facing stress.
Foreign Investment: Strategic deals and investments from global players can bring fresh capital and increase investor confidence.
Digital Transformation: Banks that invest in digital platforms and financial technology are likely to perform better in the long run.
Indian banking stocks are currently navigating through a phase of uncertainty. While some banks are delivering strong results, others are struggling due to economic pressure and loan defaults. Foreign investors are showing interest, and policy support from the RBI continues to provide a cushion.
The coming months will be crucial. Banks that maintain strong asset quality, adapt to changing market needs, and manage risks carefully are expected to do well. The overall outlook remains cautious but not negative. With the right mix of reform, regulation, and strategic action, Indian banking stocks could regain strength and offer good returns over the medium to long term.
