INDIA: An introduction to Banking & Finance

The banking and finance sector in India has significantly evolved over the years, keeping pace with the shifting economic landscape and the changing needs of businesses and individuals. From the era of traditional banking to the current phase marked by digital transformation and financial inclusion, the industry has witnessed the emergence of various banks and financial institutions, the introduction of new products, and transformed delivery channels. This presents an ideal opportunity to reflect on the factors that have shaped current practices, assess prospective trends, and consider future drivers of growth.

A surge in corporate lending

For this analysis, it is pertinent to begin in the 2010s—a decade marked by a surge in corporate lending as banks actively extended credit to capital-intensive sectors such as infrastructure, power, and steel. Driven by ambitious corporate strategies and government initiatives for rapid expansion, these projects operated with high leverage and aggressive growth targets, resulting in substantial activity in project financing among bankers and legal professionals.

Signs of distress

Midway through the decade, several large-scale loans exhibited signs of distress. During this period, both banks and regulators facilitated loan rollovers to delay recognition of stressed assets, anticipating a market correction that would resolve underlying issues. Regulatory authorities introduced schemes to enable such extensions, leading financiers and legal experts to focus on refinancing and restructuring debt portfolios.

Systemic stress

However, persistent oversupply, declining tariffs, delays related to land and environmental clearances, and additional regulatory challenges led to systemic stress. By the latter half of the decade, large borrowers accounted for a disproportionate share of non-performing assets (NPAs) within the sector. In response, policy direction shifted significantly. The Reserve Bank of India (RBI) identified a group known as the “Dirty Dozen”—12 major corporate accounts responsible for a substantial portion of NPAs—and mandated insolvency proceedings to expedite resolution. Although the Supreme Court later overturned this directive on procedural grounds, it signaled a decisive move toward stricter oversight. Previous regulatory frameworks were replaced with more rigorous mandates, requiring resolution plans for defaults within tight deadlines failing which insolvency action was to be initiated. Consequently, insolvency and bankruptcy became prominent practice areas for law firms, and specialist departments were established within banking institutions.

A shift in lending behaviour

This phase ushered in effective NPA resolution, accompanied by a notable shift in lending behaviour. Corporate lending diminished, with banks focusing on retail and SME credit. This transition fueled growth in non-banking financial companies (NBFCs) and fintech lending, particularly for personal and unsecured loans. Notably, India's COVID-19 economic response prioritised liquidity measures—such as RBI rate cuts, the Emergency Credit Line Guarantee Scheme, and moratoriums for existing credit—over direct cash transfers. These supply-side interventions aimed to support businesses during periods of uncertainty and received both criticism and praise regarding fiscal prudence.

Following the pandemic, momentum in retail and SME lending persisted. NBFCs became increasingly active, both as lenders and borrowers, tapping into domestic and international financial markets to meet demand. Simultaneously, fintech firms expanded rapidly, further modernising the sector. Financial professionals dedicated considerable effort to establishing robust fintech capabilities.

Credit cycles offer economic support

Currently, credit cycles driven by retail, SME, and MSME segments have supported the economy during challenging periods. While this trend continues, emerging concerns exist—particularly in the unsecured personal loan market. Corporate lending remains subdued due to cautious sentiment, and despite early signs of recovery in capital expenditure, activity remains tempered. Buoyant equity markets have provided alternative sources of liquidity, dampening interest in debt markets to an extent. Nevertheless, private credit is gaining traction for varied purposes, including mezzanine debt, bridge financing, and acquisition funding. This in turn has seen increased activity amongst credit funds and other players in this category. Presently, major corporate lending and project finance are concentrated in sectors like renewable energy, data centres, refineries, petrochemicals, roads, real estate, warehousing, and logistics. Retail-driven credit, propelled by NBFC activities, remains a central pillar of the sector. While banks and financial institutions remain liquid and regulators on the one hand have implemented supportive liquidity measures, the RBI has on the other hand increased risk weights on consumer credit and bank lending to NBFCs as a caution. Additionally, higher provisioning is proposed for infrastructure and project financing.

A pivotal moment

In summary, the Indian banking and finance landscape stands at a pivotal moment, with expectations of renewed capital expenditure cycles underpinned by government initiatives such as Production Linked Incentive (PLI) schemes and advances in emerging industries like new energy, semiconductors, artificial intelligence, and energy storage. It is anticipated that the emphasis on retail credit, digital banking, and fintech innovation will persist, ensuring sustained activity and deal flow within the sector. Professionals in banking and finance law can expect continued engagement with this dynamic environment.