India: A Banking & Finance Overview

A Pivotal Moment in Indian Banking and Finance Development and Regulation

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, transformed delivery channels and enhanced privacy and security measures. This presents an ideal opportunity to reflect on the factors that have shaped current practices, assess prospective trends, and consider future drivers of growth.

From past to present

For this analysis, it is pertinent to commence from 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.

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.

However, project implementation inefficiencies, paucity of firm fuel supplies, change in law, cancellation of licences, delays in land acquisition and issue of environmental clearances, and additional regulatory challenges contributed 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 signalled a decisive move toward stricter oversight. Previous regulatory frameworks were replaced with more rigorous mandates, with better inter-creditor co-ordination, requiring faster implementation of resolutions along with stricter controls on permitted resolution applicants. The new framework required minimum viability criteria to be met for debt restructuring and provisioning upgrades. Failure to meet the timelines required mandatory insolvency initiation by the creditors. Consequently, insolvency and bankruptcy became prominent practice areas for law firms, and specialised departments were established within banking institutions for monitoring and resolving stressed loans.

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 fuelled 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.

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.

Striving towards Viksit Bharat

Presently, major lending and project finance are concentrated in sectors like renewable energy, data centres, refineries, petrochemicals, airports, roads, real estate, warehousing, and logistics with the government undertaking major initiatives especially in the infrastructure, manufacturing and defence sectors with strong focus and impetus on “Make in India” and realising the goal of “Viksit Bharat” – the vision to make India a developed nation by 2047. Furthermore, various statements and announcements by the government regarding allowing private sector participation in the nuclear energy space, and the desire to increase self-reliance in the shipping sector are likely to open up new areas for financing.

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. The RBI issued a circular introducing modifications to the existing norms governing infrastructure lending. Although many of these requirements align with prudent practices already observed by banks when financing large-scale projects, the updated regulations have adopted a more prescriptive approach, keeping in mind the high risks associated with project financing. While this has been welcomed by some as a measure of cautionary prudence, critics are skeptical of its “one size fits all” prescriptiveness given how wide, diverse and different each sub-sector is, within the broad ambit of the infrastructure sector.

Meanwhile, India and the world in general have gone through various geo-political events which have influenced policy. Cross-border trade-related concerns have prompted governments to focus on domestic consumption by implementing initiatives on both the supply and demand fronts. On the demand side, the government has rolled out a major overhaul in GST (Goods and Services Tax) slabs, significantly streamlining the system. On the supply side, enhanced credit availability has been prioritised, with the RBI proposing to relax “large exposure” norms to enable banks to direct more funding to well-rated corporates. The RBI’s press release also hinted at permitting acquisition financing by banks which is expected to free up capital for new ventures and acquisitions. Furthermore, the RBI has released a draft regulation on external commercial borrowings (ECBs), which, relative to current norms, appears notably less restrictive. This is expected to improve access to foreign debt and boost domestic production.

Conclusion

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 sectors like nuclear energy, new energy, semiconductors, artificial intelligence, defence 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. Significant announcements by the RBI have set the stage for interesting times ahead with newer areas for credit growth. Overall, both domestic and foreign participants in the banking and finance sector have much to look forward to as new developments and regulations take shape.