PSU banks, mid-sized lenders power Q3 credit growth; MFI, credit card stress eases: Nitin Aggarwal

Indian banks delivered a healthy set of third-quarter business updates, led by strong loan growth across public sector banks and select mid-sized lenders, even as stress pockets in microfinance and credit cards continued to ease gradually, according to Nitin Aggarwal, Head of Banking & Financial Research at Motilal Oswal Financial Services.

Speaking to ET Now, Aggarwal said overall credit momentum remained robust, supported by improving asset quality trends and a seasonal pickup in lending activity. “We are tracking close to 12% year-on-year credit growth for FY25, which is a healthy outcome for the system,” he said.

PSU banks, mid-sized lenders show strong traction

Aggarwal noted that PSU banks posted particularly strong growth numbers in Q3, while mid-sized lenders such as AU Bank and Equitas also reported solid quarter-on-quarter loan expansion. The performance signals stabilisation in unsecured portfolios after a prolonged period of asset quality stress.


“This quarter should see moderation in slippage run rates, especially as portfolios stabilise after a sharp deterioration over the past few years,” he said, adding that Q3 and Q4 are typically strong quarters for the banking industry.

Microfinance stress nearing its trough

On the microfinance (MFI) segment, Aggarwal said asset quality challenges persisted through most of FY25 but signs of normalisation are now emerging. While loan books have contracted sequentially, collection efficiencies have improved sharply.

“Month-on-month collection efficiency for several MFI lenders has crossed 99%. The worst of the pain around slippages and collections is largely behind us,” he said. Aggarwal expects further improvement in Q4 as portfolios return to normal operating levels.

RBL, Yes Bank face lingering asset quality issues

Aggarwal flagged continued pressure on banks such as RBL Bank and Yes Bank, driven largely by stress in microfinance and credit card portfolios. While larger private banks have stabilised their card books, recovery for mid-sized players is taking longer.

“For RBL Bank, asset quality remains the key monitorable, but with the ongoing transaction, that development could be a bigger driver for the stock than near-term quarterly performance,” he said. Aggarwal expects RBL’s return on assets to improve towards 90 basis points in Q4, with further gains likely in FY27.

Net interest margins close to bottom

On margins, Aggarwal believes the banking system is close to the bottom of the net interest margin (NIM) cycle, despite the recent 25 basis point rate cut. Q3, however, is likely to be mixed.

“Banks like IDFC First, Kotak, Bandhan, Equitas and AU Bank should report NIM expansion, while some large private and PSU banks may see marginal pressure,” he said. A broader-based margin recovery is expected from Q4 onwards as funding costs soften.

NBFC growth moderates; CV cycle improves

Aggarwal said the slowdown in growth at Bajaj Finance was largely on expected lines, reflecting moderation in unsecured and MSME lending. He added that retail credit growth across the system is showing early signs of revival.

In contrast, vehicle finance is seeing a recovery. Strong disbursement growth at M&M Finance points to improving conditions in the commercial vehicle (CV) cycle.

“Within vehicle finance, Shriram Finance remains our preferred pick given its growth outlook and improving profitability,” Aggarwal said.

Gold financiers benefit from metal rally

Gold loan financiers such as Manappuram and Muthoot continue to benefit from rising gold prices, which Aggarwal described as a key tailwind. While valuations appear stretched, strong loan growth and supportive macro conditions should sustain performance.

“Gold financiers remain a direct proxy on gold prices, and momentum continues to favour the sector,” he said.

Stock-specific approach remains key

Aggarwal stressed that banking performance remains highly divergent, making stock selection critical. Motilal Oswal continues to prefer ICICI Bank and HDFC Bank among large private lenders, SBI and PNB among PSU banks, and AU Bank in the mid-sized segment.

On HDFC Bank’s elevated credit-deposit ratio, Aggarwal said expectations need to be recalibrated. “The glide path to lower CD ratios will take longer, even though liquidity conditions have improved,” he said, adding that loan growth sustainability remains closely linked to deposit mobilisation over the next few quarters.