India’s Banking Sector – The journey of Strength and Trust

Why in News?

As the world’s fourth-largest economy, India’s financial sector has evolved into a resilient and dynamic force, ready to power the country’s growth ambitions and investment needs.

What is the present status of India’s Banking system?

• Bank deposits and credit (domestic) – They have nearly tripled between 2015 and 2025, with deposits rising from Rs.88.35 lakh crore to  Rs.231.90 lakh crore and credit expanding from Rs.66.91 lakh crore to Rs.181.34 lakh crore.
• Capital buffers – They have strengthened, the capital to risk weighted assets (CRAR), which measures capital adequacy, rose from 12.94% in March 2015 to 17.36% in March 2025 with CET-1, which represents the highest quality capital a bank can hold, increasing from 9.98% to 14.81% during the same period.
• Asset quality – Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) have reduced to 2.2% and 0.5% in March 2025 after rising to highs of 11.18% and 5.94% respectively in March 2018.
• NPA Decline – As a result of the Government’s strategy of recognition, resolution, recapitalisation and reforms, gross NPA ratio have since declined to Rs.2,73,413 crore (gross NPA ratio of 2.79%) as on 31st March 2025.
• Further, as per RBI data on domestic operations, stressed assets, including restructured standard assets, as percentage of gross advances in SCBs has declined from 9.8% as on 31st March 2014 to 3.55% as on 31st March 2025.
• Bank Profitability on the Rise – As per the RBI, India’s banking sector is sufficiently capitalized and well-regulated.
• Notably, profitability of banks improved for the sixth consecutive year in 2023-24.
  • Public Sector Banks – From FY 22–23 to FY 24–25, the total Business of Public Sector Banks (PSBs) rose from Rs.203 lakh crore to Rs.252 lakh crore
  • From FY 22–23 to FY 24–25, net profit increased from Rs.1.05 lakh crore to Rs.1.78 lakh crore.
  • Dividend payouts grew from Rs.20,964 crore to Rs.34,990 crore, reflecting the continued strengthening of financial performance.
  • Scheduled Commercial Banks (SCBs) – During FY 24-25, SCBs recorded their highest ever aggregate net profit of Rs.4.01 lakh crore, compared to the net profit of Rs.3.5 lakh crore in FY 23-24.
  • The growth trajectory continues, as SCB’s recorded an aggregate net profit of Rs.1.02 lakh crore in first 3-months of FY26.
  • Continuing on this success, the profitability of SCBs improved during FY 25, with Profit After Tax surging by 14.7% (YoY).
  • Gains in profitability continued with Return on Assets (RoA) at 1.37% and Returns on Equity (RoE) at 14.1%.

What are the measures that is propelling performance of India’s banks?

• The Asset Quality Review (AQR) – It was launched in 2015 which compelled banks to recognize the true state of their loan books, bringing hidden NPAs to light and strengthening the supervisory framework.
• 4R’s strategy – The Government also implemented a comprehensive 4R’s strategy, consisting of:
  • Recognition of NPAs transparently,
  • Resolution and recovery of value from stressed accounts,
  • Recapitalizing of PSBs, and
  • Reforms in PSBs and the wider financial ecosystem for a responsible and clean system.
• The Prompt Corrective Action (PCA) framework – It helped restore the health of weak banks, followed by the consolidation of 27 PSBs into 12 by 2020.
• A detailed review of business in terms of sustainability, profitability, viability and projections along with credit risk related actions have been beneficial.
• The Insolvency and Bankruptcy Code (IBC) – It was introduced in 2016, along with complementary out-of-court resolution mechanisms.
• It transformed India’s credit culture and improved recovery processes.
• It changed the creditor-borrower relationship, taking away control of the defaulting company from promoters/owners and debarred willful defaulters from the resolution process.
• Sharper recovery laws – Key legislations such as the SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and the Recovery of Debt and Bankruptcy Act have been amended to enhance their effectiveness in asset recovery.
• Focused debt resolution – The pecuniary jurisdiction of Debt Recovery Tribunals (DRTs) was raised from Rs.10 lakh to Rs.20 lakh, enabling them to prioritize higher-value cases and improve recovery efficiency.
• Specialized recovery mechanisms – PSBs have established dedicated stressed asset management units for close monitoring and faster resolution of NPAs.
• The deployment of business correspondents and incorporation of a business strategy that uses physical sales and marketing force to interact directly with customers (Feet-on-street model), has further boosted recovery efforts.
• In October 2025, the RBI issued a landmark reform through its Draft Directions 2025, proposing a shift to the Expected Credit Loss (ECL) framework.
• The framework applies to scheduled commercial banks, including foreign banks, and introduces a risk-sensitive approach to provisioning.
• These are expected to further support credit risk management practices, promote greater comparability across financial institutions, and align regulatory norms with globally accepted regulatory and accounting standards.
• Proactive stress management – The RBI’s Prudential Framework for Resolution of Stressed Assets promotes early identification, reporting, and time-bound resolution of stressed loans, with incentives for lenders to act swiftly.

What are the evolving priorities in India’s banking landscape?

• Priorities - The following priorities outline the path ahead for strengthening the banking ecosystem and supporting India’s broader development goals:
  • Strengthen deposit mobilization through targeted drives, effective use of branch networks, and deeper outreach in semi-urban and rural areas to sustain strong credit growth.
  • Identify emerging commercial growth areas over the next decade to enhance profitability and maintain momentum in economic expansion.
  • Deepen corporate lending in productive sectors while upholding robust underwriting and risk management practices.
  • Advancing India’s Green Growth Agenda by scaling up lending to renewable and sustainable energy sectors.
  • Develop tailored credit models to support new initiatives such as Small Modular Nuclear Reactors (SMR) announced in Budget 2025–26.
  • Broaden financial inclusion through key government schemes- PM MUDRA Yojana, PM Vishwakarma, PM Surya Ghar Muft Bijli Yojana, PM Vidyalaxmi, and Kisan Credit Card (KCC).
  • Focus on Agri credit under the PM Dhan Dhanya Yojana in 100 low-productivity districts with customised credit products to improve farm output and local economic growth.
  • Expand international presence by strengthening operations in GIFT City, supporting India’s global financial aspirations, and enhancing participation in the India International Bullion Exchange (IIBX).
  • Enhance customer experience through faster grievance redressal, user-friendly multilingual digital platforms, and clean, accessible physical branches in metro and urban centres.

What lies ahead?

• India’s banking sector has transformed from a period of stress to one of strength and stability.
• With cleaner balance sheets, robust capital buffers, and record profitability, banks today are more resilient, efficient, and future-ready.
• Driven by reforms, digital innovation, and financial inclusion, the sector is powering India’s growth ambitions- financing infrastructure, supporting entrepreneurs, and advancing green and inclusive development.
• As India moves toward becoming the world’s third-largest economy, its banks stand at the forefront- anchoring financial stability and fuelling the nation’s next decade of growth.

Reference

PIB| Robust Banking Sector of India