Indian Banks Brace for Rising Loan Loss Provisions Amid Microfinance Strains

Major Indian private-sector banks are expected to sharply increase provisions for loan and lease losses, driven by mounting stress in the microfinance sector. This follows a directive from the Reserve Bank of India requiring banks involved in microfinance lending to ensure borrowers fully repay outstanding loans before availing of new ones, a policy placing additional strain on microfinance institutions (MFIs).

In the second quarter of 2025, Indian banks that extend financing to microfinance such as Axis Bank (NSE: AXISBANK), IndusInd Bank (NSE: INDUSINDBK), IDFC First Bank (NSE: IDFCFIRSTB), Bandhan Bank (NSE: BANDHANBNK), and RBL Bank (NSE: RBLBANK) reported significant provisioning for loans, exceeding analyst expectations. In contrast, HDFC Bank (NSE: HDFCBANK) and ICICI Bank (NSE: ICICIBANK) demonstrated resilience, aided by diversified portfolios and limited exposure to the sector.

As pressures mount, analysts now estimate higher provisioning requirements for banks with substantial microfinance exposure, compared to expectations before the second-quarter results. Visible Alpha consensus shows analysts also project a rise in the ratio of provisions for loan and lease losses to pre-tax, pre-provision earnings for these banks, reflecting a larger share of earnings being allocated to potential loan losses and signaling heightened credit risk in their loan portfolios.