Eight wishes for Indian banking in 2025

Indian banking sector faces headwinds.

As 2025 dawns, it carries an air of unease. The world faces bleaker macroeconomic conditions and escalating geopolitical tensions compared to the year prior. The upcoming transition of power in the United States may usher in a new era of accelerated deglobalisation, a trend likely to curtail global economic growth, India included.

India’s banking sector, which ended FY24 on a high note, now faces headwinds. Record profits and minimal credit costs, buoyed by a post-pandemic recovery and favourable interest rate spreads, gave way to challenges in the first half of FY25. Rising stress in consumer credit and slowing credit growth have eroded performance, a trend likely to persist through the year. Against this backdrop, here is a blueprint for what Indian banking must strive for in 2025.

Stabilising Credit Growth

FY24 saw robust credit growth exceeding 14 percent, driven by unsecured consumer lending, credit to SMEs, and loans to NBFCs. However, regulatory tightening and slowing consumption have dampened these sectors, with overall credit growth slipping to 11 percent by November 2025. While this aligns with the decade-long average growth rate of 11.4%, it is insufficient to sustain the momentum of India’s GDP expansion. Policymakers and banks must guard against further deceleration, as any additional decline could signal deeper economic malaise.

Addressing the Deposit Growth Challenge

The past two fiscal years exposed a worrying mismatch: credit expansion outpaced deposit growth, creating liquidity pressures for banks. Though this imbalance has eased due to a slowdown in credit demand, low deposit growth remains a structural issue. Banks must find ways to bolster deposit mobilization to support healthy credit growth without jeopardizing liquidity.

Cybersecurity: A Growing Imperative

Indian banks have made commendable strides in technology adoption, enabling greater customer convenience and reducing costs. Yet, this progress has also increased exposure to cyber threats. While India has avoided a systemic cyberattack thus far, vulnerabilities remain. Maintaining vigilance and resilience against such risks is critical to safeguarding the integrity of the financial system.

Containing Credit Costs

Unsecured consumer credit, which grew at a brisk 22 percent annually over the past decade, is now showing signs of stress. Rising delinquencies in credit cards and personal loans pose risks, with potential spillovers to adjacent sectors like SME credit and affordable housing. If these stresses escalate, they could drive up system-wide credit costs, a scenario that regulators and banks must act swiftly to prevent.

Pushing for Consolidation and Privatization

India’s fragmented banking system, with over 100 scheduled banks, suffers from inefficiencies and high intermediation costs. Consolidation, particularly among private-sector banks, can unlock economies of scale and enhance system-wide efficiency. Meanwhile, efforts to privatize even a single government-owned bank have stagnated. Successfully executing such privatization would send a strong signal of reform, even if its immediate impact on competitiveness is modest.

Implementing ECL-Based Provisioning

The move to expected credit loss (ECL) provisioning, slated for April 2025, is a watershed reform for Indian banking. However, many mid-sized and small banks lack the data infrastructure and governance capacity to implement it effectively. Regulators may need to provide phased support to ensure a smooth transition without compromising the reform’s long-term benefits.

Revitalizing Securitization

With deposit growth constrained, securitization offers banks a pathway to sustain credit expansion. India’s large mortgage book presents an untapped opportunity for securitization, which can attract long-term capital from insurers and pension funds. Developing this market will require coordinated efforts to boost investor confidence and create robust demand for securitized instruments.

Staying the Course in a Difficult Year

The challenges facing Indian banking in 2025 are numerous and complex. Addressing slowing credit growth, managing risks, and pursuing reforms will require cautious oversight from bank management and vigilant regulation. While the road ahead is uncertain, the focus must remain on navigating these obstacles to lay the foundation for a more resilient and efficient financial system.