Prospects of banking in India

Time of India

2 days ago

Dr Rao is currently teaching risk management in the institute of Insurance and Risk Management (IIRM). A career banker with Bank of Baroda, he held the position of General Manager - Strategic Planning, Later was Associate Professor with National Institute of Bank Management (NIBM) and was Director, National Institute of Banking Studies and Corporate Management (NIBSCOM). He writes for financial dailies on Banking and Finance and his work can be viewed in the public domain.His academic accomplishments include Ph.d in commerce from Banaras Hindu University (BHU), MBA ( Finance), LLB. He runs a Youtube channel - Bank on Me - Knowledge series He likes to share his perspectives with next generation potential leaders of the banking industry. His book on "Transformation of Public Sector Banks in India' was published in september 2019. His most interesting work is in Ideasforindia.com blog. LESS ... MORE
The recently published annual report of RBI – FY25, the Monetary Policy of RBI – June 6, 2025, and the Financial Stability Report (FSR) – June 2025, all unanimously observed that the economy is strong, resilient, and remains one of the fastest-growing large economies. The IMF states that the Indian economy will continue this trend in 2025 and 2026. RBI's forecast for GDP growth in FY26 is 6.5 per cent, potentially reaching 6.7 per cent in FY27, providing a solid foundation for rapid growth across various sectors.
If the Indian economy is to reach a GDP of US $30 trillion by 2047 and become a developed economy, it must grow at an average of 8-9 per cent annually. To accomplish this, it will need strong support from both banks and non-banks to lend sufficiently to entrepreneurs and stimulate growth. The coordinated efforts of banks and non-banks in lending to enterprises will be vital to unlock the full potential of the economy.
The assets in the financial services sector need to grow twenty times larger than they are now. By March 2025, the total value of assets in the financial industry is expected to range between Rs 730 trillion and Rs. 760 trillion. Banks primarily drive India's economy. Out of the estimated average total assets of Rs760 trillion in the financial sector, banks make up 55 percent, with Rs 415 trillion in assets. The Reserve Bank of India (RBI) accounts for 10 percent, with Rs 76 trillion in assets. Insurers hold a 15 percent share with assets valued at Rs. 115 trillion, while all other NBFCs, including fintechs, have around Rs159 trillion in assets.
The financial system could grow 20 times, so banks should adopt innovative technology tools to support sustainable growth, employment, education, and healthcare, which are essential. However, success will depend on strong banking systems with coordinated partnerships with NBFCs, including fintech innovation, and the integration of the informal economy.
Due to a limited asset base, only two Indian banks currently rank among the top 100 international banks. The State Bank of India (SBI), in 43rd place, and HDFC Bank, in 73rd place, are included in the top 100 global banks by assets, according to S&P Global Market Intelligence's April 2025 ranking. India, despite being the fourth-largest economy, has only two banks on this list. This was pointed out in several forums and highlighted in the economic survey, emphasizing the need to increase the asset base of banks.
This underscores the need to expand its asset base and enhance credit risk appetite. While Indian banks have sufficient capital adequacy, their credit-to-GDP ratio remains low at only 62 per cent. In comparison, China's credit-to-GDP ratio is 161 per cent, Japan's is 314 percent, the US's is 210 per cent, the UK's is 145 per cent, and South Africa's is 133 percent. Indian banks should increase their credit risk appetite to align with the credit-to-GDP ratios of their global peers. More lending/deposit schemes aligned to the changing demographic profile are needed to compete actively with alternative market players.
1. Gearing up for higher growth:
In the coming years, to grow the banking system's assets, an additional Rs 4 trillion in new capital will be needed. The IPO market is thriving. In 2024, equity markets raised IPOs totaling Rs1 lakh crore. Retail investors now hold over 170 million demat accounts. There is a growing focus on insurance penetration and resilience, including popular schemes like Ayushman Bharat and fintech-driven microinsurance.
In the area of technology adoption, banks can further develop cloud computing and AI, which includes machine learning, blockchain, and data analytics. Fintech convergence introduces cyber risks—adopting a zero-trust security model, AI-based fraud detection, regular drills of Business Continuity policy (BCP), and compliance with RBI, IRDAI, and SEBI are essential.
Jan Dhan, Aadhaar, and Mobile (JAM) trinity greatly expanded banking access. Different types of banks – Small Finance Banks, Payment Banks, and NBFCs – also partnered heavily in financial inclusion efforts, with fintech playing an active role. The benefits of widespread financial inclusion and digital adoption should support the MSME sector, which makes up about 30% of GDP, but only 40% of these businesses are officially banked; increasing that to 80% could be transformative.
It's observed that NBFCs provide 23 per cent of MSME credit and leverage technology and local networks to serve underserved segments. RBI establishes a regulator-led, tiered oversight system to support them. The government encourages NBFCs to increase their share of credit to MSMEs from the current levels to 50 per cent. Banks and NBFCs must collaborate to enhance lending quality to the MSME sector through better credit risk management and technological advancement.
Post-NPA reforms—such as IBC 2016, the formation of IBBI, activation of NCLTs, and the creation of NARCL (Bad Bank), reforms of ARCs—have improved banks' asset quality.
In an AI-driven, constantly changing work environment, as many industries adopt 'AI Virtual Assistants', the threat of skill redundancy looms. Even autonomous AI super agents are entering the industry to perform independent teamwork. Reshaping skills and strategic skill-building will be necessary. Individual employees in banks must focus on their innate talents and develop appropriate skills to stay relevant in the industry.
Therefore, the financial sector needs talent in various areas such as strategy, leadership, market intelligence, and the ability to understand macroeconomic and geopolitical trends. New skills required include AI, cloud computing, cybersecurity, risk management, accounting and audit, digital onboarding, and compliance. Collaboration among banks, fintechs, academia, and NISM can foster continuous learning and innovation hubs.
2. State of the Banking system:
FSR June 2025 indicated that banks maintain strong capital buffers (CRAR around 17.2–18.0%) and have multi-decade lows in NPAs (2.3%), positioning them to withstand adverse shocks. Even under stress scenarios—such as a global slowdown or banks' worst debt outcomes—capital levels remain well above the 11.5 % regulatory minimum. Banks have sufficient resilience to support growth and absorb shocks.
However, some concerns exist for banks, as the cost of credit might increase, impacting the pricing of loan products. Following the Covid-19 pandemic, household debt has risen to 42% of GDP. Growing unsecured retail lending (credit cards, personal loans) needs close oversight. It will be essential to overhaul and significantly improve the underwriting standards of credit to ensure sustainable growth with faster processing times and appropriate risk-adjusted pricing. A gradual and balanced lending approach, risk adjusted well calibrated sectoral exposure to credit, targeting quality over quantity, could make a whole lot of difference to sustained credit quality.
FSR also highlights vulnerabilities related to the rapid adoption of digital lending channels, cybersecurity, and vendor risks. RBI's broader framework including goals like sandboxing, UPI interoperability, digital rupee (CBDC), and AI in risk management—suggests future growth in digital finance. A digitally empowered banking ecosystem, supported by stronger technology governance.
Banks' internal macroeconomic intelligence system must be upgraded to detect the impact of heightened geopolitical tensions and trade uncertainties, which could pose hidden risks to bond markets and capital flows. Substantial foreign exchange reserves, surpassing US $700 billion, and resilient domestic demand help cushion external shocks. Banks will maintain vigilance and will be working on strategies for liquidity and capital aligned with global volatility.
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Views expressed above are the author's own.