Indian Banking Sector Sees Growth and Challenges

The Indian banking sector has witnessed significant growth and improvements in recent years. According to the central bank, the asset quality of non-bank finance companies has improved further in 2024-25, with sustained double-digit balance sheet growth.

Banking Sector Performance

Banks’ deposits and credit grew in double-digits percentages in FY25, although at a slower rate compared to the previous year. The profit growth of banks also moderated due to lower interest margins. However, lenders remain well-capitalised, with leverage and liquidity ratios well above the regulatory minimum.

Climate Change and Financial Stability

The central bank has highlighted the growing risks from climate change to financial stability. To address this, it is building an information system to identify climate risks and working towards a climate risk disclosure framework. Climate finance is considered a national imperative and a collective responsibility, requiring coordination across regulators, institutions, governments, and global actors.

Competition and Technological Challenges

The banking sector is expected to face increasing competition from equity markets and technology. Non-bank sources, such as equity markets, will continue to lend to companies, while fast-changing technology could alter how customers transact and pose cybersecurity risks. The report notes that funding for the commercial sector grew due to an increase in flows from non-bank sources, led by the equity markets.

Funding for Commercial Sector

The increase in funding from non-bank sources in FY25 was largely driven by buoyant domestic capital markets, reflected in higher equity issuances and increased corporate bond placements. Non-food bank credit accounted for 55% of total resources to companies as of end November 2025, while the remaining 45% came from non-bank sources, including equity issuances, corporate bonds, commercial papers, and overseas borrowings.

Technological Advancements and Risks

Rapidly changing technology and digitalisation could change the way people transact with banks for their savings and credit needs, while also exposing the banking system to new risks. Strengthening risk assessment and improving operational efficiency through responsible technology adoption remain essential, with continued emphasis on financial inclusion, consumer education, and protection.

Conclusion

In conclusion, the Indian banking sector has made significant progress in recent years, with improvements in asset quality and sustained growth. However, the sector also faces challenges, including climate change, competition from non-bank sources, and technological risks. To address these challenges, the central bank is working towards building a climate risk disclosure framework, improving operational efficiency, and promoting financial inclusion and consumer protection.