CMA Hrishikesh R Nampoothiri
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The Indian banking sector has demonstrated resilience and strong financial health, as highlighted in the Economic Survey of India presented by Union Finance Minister Nirmala Sitharaman on January 31, 2025. The survey notes that the sector remains well-capitalized, with the gross Non-Performing Assets (NPA) ratio declining to a 12-year low of 2.6%. Additionally, the Capital to Risk-Weighted Assets Ratio (CRAR) of Scheduled Commercial Banks stands at 16.7%, well above the regulatory requirement. However, emerging challenges such as rising stress in unsecured loans and global financial uncertainties necessitate continued vigilance.
As of September 2024, approximately 52% of new NPAs in the retail loan portfolio originated from unsecured segments, including personal loans and credit card defaults. The Reserve Bank of India's (RBI) Financial Stability Report, published in December 2024, further underscores this issue, revealing that nearly half of borrowers with unsecured loans also hold large secured loans, such as home and vehicle loans. This interconnection raises concerns over increased credit stress, as defaults on smaller personal loans could trigger delinquencies in larger secured loans. The survey highlights that when a borrower defaults on any loan category, financial institutions classify all loans held by the individual as non-performing, amplifying systemic risk.
Another challenge within the banking sector is the widening gap between credit and deposit growth rates. The Economic Survey notes that, on average, credit growth outpaces deposit growth in cycles lasting about 41 months. While deposit growth remains in double digits, there has been a noticeable shift towards higher-yield schemes, reflecting changing customer preferences. This imbalance necessitates proactive liquidity management by financial institutions to avoid potential shortfalls.
The survey also stresses the importance of monitoring developments in both Indian and global financial markets. While India's financial system has shown resilience, external factors—such as fluctuations in the U.S. stock market—could have spillover effects. Any major correction in global equity markets may influence capital flows, exchange rates, and liquidity in the Indian banking sector, warranting cautious oversight.
Technological advancements, particularly in Artificial Intelligence (AI) and Machine Learning (ML), are playing an increasingly crucial role in banking operations. AI applications are enhancing credit underwriting, fraud detection, regulatory capital planning, and risk management. Moreover, AI-driven chatbots and personalization tools have improved customer engagement and service efficiency.
However, the survey warns of associated risks, including the opaque "black-box" nature of AI algorithms, which makes decision-making difficult to audit. Other concerns include insufficient human oversight, cybersecurity threats, over-reliance on AI-driven systems, and third-party dependencies. Ensuring transparency and accountability in AI-powered financial decision-making will be crucial in maintaining consumer trust and regulatory compliance.
The traditional dominance of banks in credit provision is gradually diminishing, with non-banking financial institutions and alternative financial products filling the gap. The survey underscores the need for proactive regulatory measures to mitigate risks while enabling innovation. Banks must adapt to evolving consumer preferences and digital economy trends while maintaining their core function of credit creation.
Despite steady improvements in profitability, asset quality, and capital adequacy, the rise in consumer credit and the expansion of non-banking financial channels call for continuous regulatory vigilance. Ensuring a stable, well-regulated banking environment will be key to sustaining India's economic growth in the years ahead.