Axis Bank was hit by a surge in bad loans as it conducted a one-time benchmarking exercise, which made its net profit fall unexpectedly by 4% in the quarter ended June and put pressure on the country’s fourth-largest private lender to improve recoveries during the course of the current financial year.

The highest impact was felt on the retail unsecured loan segment even as gross slippages inflated to Rs 8,200 crore in the three months ended June, from about Rs 4,800 crore in both the previous year-ago quarters.

"As a bank, we do an internal benchmarking exercise to the market best practices annually. This time we found an odd bank that was following criteria more stringent than us, and that benchmarking led to the change that we made," Axis Bank chief financial officer Puneet Sharma said in an earnings call, without naming the lender or giving details on the benchmarking exercise.

The two concerning factors in the bank’s financial performance are the deterioration in asset quality and the sharp fall in net interest margins (NIM). Net profit was impacted, falling below market expectation to Rs 5,806 crore in the June quarter from Rs 6,035 crore a year ago. Sequentially, the drop was 18% from the March 2025 quarter.

NIM

Amid interest rate cuts by the Reserve Bank of India (RBI), the lender’s NIM shrunk to 3.8% from 4.05% a year earlier and 3.97% in the previous quarter. Since February this year, the RBI has reduced repo rate by 100 basis points to 5.5%.

According to brokerage firm Nuvama, Axis Bank’s NIM fell 17 basis points sequentially even when the lender has been the slowest in passing the RBI rate cuts to its customers.

When the RBI cuts interest rates, banks tend to first pass on the benefit to borrowers and then subsequently drop deposit rates. As a result, margins get temporarily squeezed.

Sharma said margins would be affected in the September quarter as well but the bank would be able to maintain a 3.8% NIM for the fiscal.

In the quarter ended June, the bank’s net interest income, or the difference between interest paid and earned, rose 0.8% year-on-year to Rs 13,560 crore.

Asset quality

Two factors accounted for the bank’s deterioration in asset quality during the fiscal first quarter. While retail unsecured slippages remained elevated, the bank made a change in the classification metric for non-performing assets (NPAs).

Of the quarter’s gross slippages of Rs 8,200 crore, Rs 7,500 crore came from retail loans, Rs 403 crore from commercial banking loans and Rs 297 crore from wholesale loans.

Sharma said the impact would be more muted in subsequent quarters, with the new slippages in the June quarter being found mostly in the lender's unsecured retail book, and specifically in its credit overdraft product.

The technical impact accounted for Rs 2,709 crore of the gross slippages, with the highest coming from the retail segment at Rs 2,165 crore, followed by Rs 310 crore in the commercial banking business and Rs 234 crore in the wholesale business.

Even otherwise, the surge in slippages is a matter of worry. Sans the technical impact, gross slippages for the quarter stood at Rs 5,491 crore, up by 13 basis points on year and 20 bps on quarter. 

Sharma said while 25% of the slippages were from the agricultural portfolio, the remaining 75% came from unsecured loans. “But we do not see stress in the secured part of our retail book as of date,” he added. 

According to Sharma, 29% of the June quarter’s gross slippages, excluding the technical impact, were from linked borrower accounts that were either standard when marked as bad loans or got upgraded again in the same quarter.

Around 80% of the individual contracts that slipped because of the technical impact and continue to remain non-performing asset (NPA) as at the end of June, are fully secured. “Hence, given the security cover, we believe that economic loss due to technical impact will be minimal over the life of such contracts,” he said.

NPAs

The bank's gross NPA ratio rose to 1.57% as of 30 June from 1.28% in the previous quarter and 1.54% in the previous year. 

Net NPA ratio deteriorated to 0.45% from 0.33% a quarter ago and 0.34% a year ago. 

Adjusted for the technical impact, the gross and net NPA ratios were 1.41% and 0.36%, respectively.

Loan recoveries and upgrades for the quarter were Rs 2,147 crore during the June quarter, down from Rs 2,790 crore in the preceding quarter. Recoveries from written-off accounts were at Rs 904 crore, up 53% on year but flat on quarter.

“If we have to identify one marginal area of improvement for ourselves, recoveries and upgrades are what we can work on,” Sharma said. 

The bank reported provisions at Rs 3,948 crore in the June quarter, from Rs 1,359 crore in Q4FY25 and Rs 2,039 crore in Q1FY25.

Loan Growth

Axis Bank's loan book grew 8% year-on-year to Rs 10.6 trillion as of 30 June 2025. This was driven by 9% growth in new loans to corporates. Retail loans grew 6% YoY to Rs 6.23 lakh crore, accounting for 59% of net advances. The share of secured retail loans was 72%. Home loans accounted for 27% of the retail book.

Personal loans grew 5% YoY, credit cards by 2% and rural loans by 5%.

Axis Bank managing director and CEO Amitabh Chaudhry said the lender’s credit growth in the medium term is expected to outpace the industry average.

"The wholesale loan book, which had not grown for a while, has started growing this quarter," he added.

Deposit growth

Total deposits grew 9% YoY to 11.61 lakh crore as of 30 June 2025. Within this, current account deposits grew 9%, saving account 3% and term deposits 12%. The share of CASA in total deposits stood at 40% at the end of Q1FY26.