India’s Banks: Powerful Growth, Rising Risks – An In-Depth Analysis
India’s financial system is in the spotlight as global investors and policymakers alike watch how its banks are navigating a world marked by turbulence, new technologies and domestic aspirations. According to S&P Global’s landmark October 2025 report, “Indian Banks: Primed for Growth,” the sector enters this decade in its strongest position since liberalization, with loan growth gathering pace, capital buffers at record highs and profitability metrics outshining most peers in Asia-Pacific. Yet, even as this optimism grows, the path to 2030 will test the sector’s discipline against recurring market shocks, funding competition and legacy vulnerabilities in MSME, unsecured and priority segment loans.
Setting the Stage: Growth Amidst Volatility
India’s macroeconomic story sets a robust context. S&P projects India’s real GDP to climb steadily from 6.5% in FY25 to 7% by FY28, making the country among the fastest-growing large economies globally. This momentum, driven by resilient consumer demand, a formalizing economy post-GST, and government-led investments in infrastructure, is fuelling credit demand. S&P forecasts bank loan growth will average 11% through FY25, accelerate to 11.5% in FY26 and reach 12.5% by FY28. Not all signs are flawless, however: the report points to headwinds like global trade uncertainties, currency depreciation and a cautious rate policy stance. A potential spike in US rates or further rupee volatility could add pressure to India’s external position. The banking sector’s fate is therefore not only a function of domestic reform, but also of its ability to withstand external shocks and policy pivots from global central banks.
Asset Quality: Normalization, Not Crisis
Contrary to past cycles, Indian banks are not bracing for a crisis in asset quality. Instead, S&P sees a process of mild normalization: weak loans, consisting of NPLs and restructured assets, are forecast to stay stable at 3–3.5% of total credit through 2028, versus a current 2.9%. Credit costs, which reached historic lows of 70 basis points in the robust post-pandemic recovery, are expected to rise modestly to 80–90 basis points as banks shift to forward-looking provisioning models. What is striking is the decline in new NPL formation down to just 1.1% per year in corporate loans, less than half the previous decade’s average, thanks to deleveraging across India Inc and more stringent underwriting standards. Prudent loan growth, disciplined risk management and regulatory push for early recognition of stress have fundamentally re-shaped the asset quality profile though S&P cautions that any loosening of these controls, especially in competitive segments, could erode these hard-won gains.
Risks in Retail, MSME and Unsecured Credit
The dark spot in the sector’s loan books remains MSME, microfinance and small-ticket unsecured retail lending. S&P’s data shows that while prime home and auto loans maintain excellent performance (delinquencies of 0.7% in housing, just 0.5% in autos), fintech and digitally originated loans under ₹50,000 are now showing defaults around 6%. MSME loans under ₹1 million are similarly prone to stress, reflecting both business cyclicality and aggressive lending by new entrants and NBFCs. The boom in digital and point-of-sale credit has allowed rapid scaling but at the cost of looser covenants and thinner risk buffers, especially in priority sector and microfinance. For example, public sector banks’ agricultural NPLs hover over 8%, and priority sector NPLs in some cases push double digits exposing these banks to regulatory action unless recoveries improve. This dichotomy resilient asset classes at the top and persistent stress at the periphery demands constant vigilance, especially as competition intensifies.
Deposit Dynamics and Funding Outlook
India’s banks have long benefited from robust deposit growth. The S&P report confirms this trend will hold deposit growth rates are expected to be stable at 11% annually through 2028. This serves as a vital foundation for lending expansion and sector stability. But the report also warns of emergent funding pressures: system-wide loan-to-deposit ratios (LDR) are projected to move from 82% today to 84% in FY28, which could challenge smaller and mid-tier banks more dependent on high-concentration bulk deposits. For instance, at select private institutions, the top 20 depositors account for over 15% of total deposits a finding that highlights the risk of a sudden outflow or funding squeeze if confidence shocks arise. The largest public lender, SBI, retains a formidable, granular deposit base and leads with market share over 20% but as interest rates soften and competition grows fiercer, even leaders will need to innovate and diversify (for example, leveraging retail term deposits, NRI remittances and digital banking to attract stable funds).
Peer Comparisons: Who Leads and Why
State-owned banks continue to anchor the financial system, accounting for over half of total sector assets SBI, Bank of Baroda and PNB are the three largest by far. But S&P’s peer analysis finds the sector’s capital build and profitability are now led by private players. HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank boast risk-adjusted capital (RAC) ratios of 12.5% or higher, significantly above the 10–11% average for top-rated public banks and exceeding many Asian peers (Singapore: 10.3%, Malaysia: 8.8%). The report also underscores net interest margin resilience, with NIMs expected to remain above 3.4% even as competitive and policy pressures mount. Profits remain robust ROAA for Indian banks will moderate from 1.4% to 1.2% by 2028 but will continue to outpace regional comparable, except Indonesia. These market leaders combine granular funding bases, diversified asset portfolios and best-in-class digital strategies to carve out efficiency and risk advantages.
Outlook: The March of Digital and Structural Innovation
S&P posits the next banking cycle in India will be defined by how well banks exploit digital learning, alternative capital markets, and fintech partnerships. The report notes a surge in NBFC financing (spurred by recent risk weight cuts), which is fuelling credit to underserved segments but also raising systemic risk, as NBFCs are less tightly regulated and more exposed to liquidity shocks. Policy interventions, such as the RBI’s ECL framework, now require banks to provision for future losses before they emerge, a world-standard approach that shifts risk out of the shadows. Sectors like renewables, data centres and semiconductors are emerging as “risk frontiers,” with corporate leverage in capital-intensive projects approaching 7–8x debt/EBITDA and free cash flows frequently negative. These are areas where traditional stress tests may understate latent vulnerabilities. S&P’s scenario analysis also cautions that moral hazard, where state or systemic bailouts are assumed, could build in project finance and key conglomerate portfolios if unchecked.
Policy and Regulatory Signals
On regulation, S&P credits the RBI’s bold reforms: Risk-based deposit insurance now offers cost relief to well-managed banks, while ECL requirements force earlier provisioning and push laggards toward greater discipline. Regulatory scrutiny on MSME, unsecured and digital lending is intensifying, setting new industry benchmarks for monitoring, reporting, and provisioning. These moves benefit long-term sector stability but will likely challenge banks with legacy exposures or weaker credit analytics. The report sees Indian banks’ pre-provision operating profits (PPOP) as comfortably outstripping credit cost forecasts through 2028, giving the system a crucial loss-absorbing shield even in stress scenarios. But it stresses the importance of going further: banks should use digital and analytics tools to anticipate early warning signs, diversify deposit collection and keep capital levels safely above regulatory floors, especially as competition and credit cycles turn.
Strategic Imperatives for Banking Leaders
Drawing on S&P’s data, Riskawareness.in’s view is that sector leaders must aggressively diversify funding sources, advance digital and risk monitoring capability, and sustain capital build as bulwarks against shock. The numbers are striking private sector leaders like HDFC Bank and Kotak now run total capital ratios above 18%, compared to a 14.3% Indian average, a feat matched by few regional peers. The leaders are also leveraging digital ecosystems and fintech partnerships for smarter underwriting and monitoring, not just for growth but for resilience. Banks lagging on these fronts faces lower ratings, higher funding costs, and greater exposure to emerging risks. The next era will reward banks with strong bench depth in technology, credit analytics, and regulatory engagement, not just those chasing headline growth.
A Decisive Decade Ahead
To synthesize, Indian banking’s future rests simultaneously on continued GDP expansion, granular risk management, and aggressive digital and business model adaptation. The S&P report is optimistic yet grounded, cautioning that the big gains of 2019-24 capital, profitability, asset quality can quickly be eroded by complacency, funding shocks or discipline lapses. The cycle now turns from easy recoveries to differentiated, value-driven, risk-aware strategies. At Riskawareness.in, our assessment is that the sector’s principal challenge will be harnessing growth without fuelling credit excess, levering technology without relaxing discipline, and achieving scale alongside stability. Responsible vigilance anchored in S&P’s statistics will be the signature of tomorrow’s banking winners.Based on S&P Global’s “Indian Banks: Primed for Growth”, October 2025. For detailed tables and peer comparisons, please visit S&P Global Ratings.
