India’s banking sector shows strong recovery, but experts stress that financial inclusion, risk management, and technology adoption must drive future reforms
Suresh Chandra Sarangi
By a stroke of pen, Indira Gandhi, the then Prime Minister in 1969, nationalised fourteen private banks, an epochal and revolutionary step, transforming class banking to mass banking.But the financial sector reform of 1991 envisaged competition, to take banking into an enviable position, which ensured competition, growth, diversification, and a vibrant financial sector, that was for efficient use of scarce resources and development of a robust financial institution that met the objectives of democratic socialism, as well as market capitalism.
The prudential norms for income generation and Asset classification and provisioning was indeed a radical departure from the traditional Indian banking, with technology adoption, creation of bank autonomy new generation of banks such as small finance banks, payment banks, lowering of the cost structure, deregulating interest rates and statutory reserves, branch expansion to hitherto untouched rural and inaccessible hinterland, and finally, ultimately culminated in financial inclusion. This improved corporate governance, regulatory ecosystem, and supervision to identify risks and systemic risks, and to find ways and means to mitigate them, with systems and procedures to provide the government with adequate capital to meet capital adequacy norms set by the Basel Committee.
Though the banking sector was advancing by leaps and bounds, a new risk, known as NPA, appeared and decimated the banks, which incurred losses and bled to such an extent that the scarce capital base was squeezed, the return on assets was just above zero or negative, and pressure was building up on the economy. So the spectacular growth story was coming to an end, cut short by NPA, provisioning, and losses, requiring recapitalisation by the Indian government at the cost of a ballooning Fiscal deficit. Although there has been phenomenal expansion and geographical coverage, policy inflexibilities, excessive directed credit, political intervention, and the coverage of the RBI master circular of 30.09.2008 on restructuring, with wrongful implementation and misuse, led to the assets turning bad and consequently the losses being reflected in their balance sheet in red.
But the reforms of 1991 set the house in order. It brought much-needed profitability, soundness, efficiency, robust credit culture, with fabulous return on Assets. But that was short-lived, and though India did not succumb to the 2008 financial crisis, as it was insulated, the restructuring clause was misunderstood, and the unscrupulous loanee took advantage of it, and then it was a saga of mindless default and seamless losses eroding capital that shook the Indian financial system up to 2014. The dark clouds hovering over the Indian financial system were feeling the pinch of breakneck losses by the banks. In 2017, the gross NPA was 9.3% as of March 2017, and the net NPA was 5.3%, which grew to 11.2% gross NPA and 6.0% during 2018. It was RBI’s strict monitoring and the IBS Act that came to the rescue of the banking system.
Now, the banks have put up a good show, but still, challenges remain. The PSBs, in the meantime, have shown better growth both in deposits and advances, thus dislodging the private sector bank’s applecart. As per newspaper reports and based on the September 2025 quarter figures, the net profit has crossed Rupees 1.5 trillion for the first time with a year-on-year growth of 4.4%. Operating profit has been affected by sluggish other income growth; net interest growth was 2.5% yoy. Other income growth was 4.7% yoy, but the -13.5% quarter-over-quarter provision is -31% QoQ, thereby adding to profit. Asset quality has been improving as the gross NPA of rupees 10 trillion has come down to 3.99 trillion. CASA has been on the receiving end, dwindling in the southward direction. Because of the reduced CASA position, the NIM has gone down, signifying the fact that funding cost is rising faster than the yield on advances.
While analysing the causes for profit downfall, it is observed that other incomes are reducing, affecting the increase in profit. Slippages are minimal, and NPA continues to fall. Provisions are down by -31%, signifying robust profit. Indian bank, which had once the worst asset quality, has today only in India’s interest.0.16%, 0.16%the best among all the public sector banks. Of course, that has come after huge write-offs and resolution under IBC. The profits of SBI, HDFC BANK, ICICI BANK, and Axis Bank have been phenomenal. However, the emerging pressure points are on the liability side, and unless Casa grows, the NIM would be under pressure. There is distinct movement from the liabilities side to the stock market and mutual funds, as they become alternative sources of higher returns, sans Trump’s tariff.
The loan demand has been good, and there is a benign credit cycle without any stress in the system. This speaks to the fact that provisions, going forward, would remain low. Treasury gains are unlikely; there are rate cuts. It is heartening that the Asset quality of public sector banks is better now. With the enviable performance of public sector or, for that matter, private sector banks, investment in technology is the need of the hour. Banks should not go overboard in sanctioning big loans. To obviate the position of low CASA deposits, the banks are now going for a certificate of deposit. The Rupee’s depreciation by already 4.5% is a blow to the banking system. The position of the Trump tariff is a dampener. The trade deal has to be negotiated faster,
The buzz around is the merger of banks to reduce it to 4 to 5, fundamentally strong, international banks, as envisaged in the financial sector reform report. This will provide the much-needed synergy to banks, with teeth to match the international banks. The fact is, it will create a much larger entity, financially viable and stable institutions, with competency and efficiency. They are strategic reforms, aiming to improve risk management, operational efficiency, and access to capital. Ideally, it would pool resources, lead to consolidation, increased reach, better oversight, and excellent geographical spread. Yes, on the flip side, it may result in closure of some banks, maybe job losses, and customer difficulties to adapt to a new culture. But in view of the HDFC BANK AND HDFC merger, this can be a feasible strategy. This will help the banks after the merger to have a better pie not only of resources, but also help the banks to grow their quality asset portfolio. The facts are within the finance ministry, and nobody knows what the shape of things to come is.
All said and done, financial inclusion and inclusive growth should be the topmost agenda. With a 30 trillion dollar economy projection for the year 2047, the reforms are to be pursued vigorously. With the turnaround expected and while steering clear of the hurdles, banking supervision has to be tightened by the regulator for a smooth journey towards 2047.
(The writer is a former General Manager of Bank of India. Views expressed are personal.)
