China’s Silent Banking Crisis
A quiet crisis is unfolding in China’s banking sector, raising concerns across global financial markets. In the first half of 2025, Chinese commercial banks reported a 7.7% decline in combined profits, slipping to 1.2 trillion yuan. This marks the first contraction since the pandemic-led slump of 2020.
Key drivers of this decline include:
- Escalating loan losses.
- A record-low net interest margin (NIM) of 1.42%, well below the 1.8% sustainability threshold.
- Weak loan demand amid a sluggish property market and repeated interest rate cuts.
Even the Industrial and Commercial Bank of China, one of the largest lenders globally, posted a 1.4% drop in net profit to 164.43 billion yuan, highlighting sector-wide stress.
For context, the property sector’s prolonged slowdown has been the single biggest drag, pushing systemic vulnerabilities to the forefront (IMF on China’s economy).
Implications for Indian Banks
While India’s banking sector has been relatively resilient, China’s struggles offer cautionary lessons.
As of March 2025, the Reserve Bank of India (RBI) reported:
- Non-performing loan (NPL) ratio for Indian banks: 2.6%, slightly higher than China’s 1.5% at the end of 2024.
- Asset quality risks remain, particularly in slowing growth cycles.
Recent Indian Banking Trends:
- Credit expansion moderation: Industrial credit growth slowed to 7.6% in June 2025, compared to double-digit growth a year earlier.
- Overall bank credit growth: Down to 9.9%, amid rising fraud cases — about 18,461 incidents reported in H1 FY25, with amounts involved showing an eightfold surge.
- Public sector banks (PSBs): Net profits reached around ₹85,526 crore in H1 FY25, supported by credit growth recovery to 11.1% by January 2025.
- Private banks: Posted 8% year-on-year PAT growth, largely due to lower provisions, though margins remain under pressure from rate reductions.
Risks of Overdependence and Margin Pressure
China’s current banking stress underscores the dangers of sectoral over-reliance. Its slowdown is closely tied to the property market crisis and broader economic cooling, with GDP growth projected at just 4% in 2025.
India faces parallel risks:
- Heavy exposure to infrastructure and retail lending.
- Possible erosion of net interest margins (NIMs) if the RBI’s accommodative stance (initiated in April 2025) persists.
- Vulnerability to export-driven shocks if global trade tensions escalate, impacting loan quality in export-oriented industries.
Such pressures could reverse the hard-earned improvements in asset quality that Indian banks achieved after the 2018 regulatory tightening (World Bank on India’s financial sector).
Broader Asian Banking Outlook
Analysts warn of a wider Asian banking profit decline, with narrowing margins and weak credit demand being common themes across the region. For India, the key risks include:
- Currency volatility due to trade wars.
- Rising non-performing assets (NPAs) in globally linked industries.
- A potential return to profitability stress, similar to what China is experiencing.
Key Takeaway
China’s banking turmoil offers a timely reminder: large financial systems are never immune to credit cycles and structural risks. For India, vigilance is crucial. While current fundamentals are stronger, maintaining asset quality, diversifying sectoral exposure, and managing interest rate cycles will be critical to avoiding a similar profit squeeze.
