Competition from equity markets and technology will keep banks on their toes: RBI

The Reserve Bank of India (RBI) said on Monday that banks will continue to face competition from non-bank sources in lending to companies, while fast-changing technology could change how customers transact and pose cybersecurity risks.

In its report on trends and progress of banking in India, the RBI said that despite a moderation in bank credit in FY25, the total flow of financial resources to the commercial sector increased, thanks to non-bank resources.

RBI defines the flow of financial resources to the commercial sector as the aggregate of bank loans, loans from non-banks, and investment by Life Insurance Corp. of India in corporate debt, apart from funds raised overseas.

"The increase in funding from non-bank sources during 2024-25 was largely driven by buoyant domestic capital markets, reflected in higher equity issuances and increased corporate bond placements amidst easing market conditions, enhanced credit flow by non-banking financial companies (NBFCs), and a rebound in short-term external credit,” it said.

45% and rising

According to the latest data from RBI’s monthly bulletin, non-food bank credit accounted for 55% of total resources to companies up to 28 November, while the rest came from non-bank sources such as equity issuances, corporate bonds, commercial papers and overseas borrowings. The share of non-food credit was at 57% in the same period of FY25, pointing to an increase in the share of non-bank sources. Non-food credit is bank credit adjusted for loans given to FCI.

The year also saw a plethora of public listings. According to a 9 December Bloomberg report, India's initial public offerings reached a record ₹1.77 trillion, surpassing the 2024 high of ₹1.73 trillion.

In August, RBI governor Sanjay Malhotra had said that although rate cuts had been quickly transmitted to money markets, large companies were increasingly relying on market-based instruments such as commercial paper and corporate bonds, reducing their reliance on banks.

“Also, as the profitability of large corporates has increased, their internal resources have become an important source for business expansion,” he said. Malhotra’s point was that although credit growth slowed in 2024-25, the broader flow of financial resources to the commercial sector has significantly improved, and that the slowdown in corporate borrowings should not be viewed in isolation.

Credit growth optimism

Analysts are optimistic about a revival in bank credit to companies. According to India Ratings and Research, credit growth of the industry segment is expected to be around 11% in FY26 — it was 7.8% in FY25 and 8.5% in FY24 — with renewables, industrials, cement, metals, and telecom sectors leading the private capex drive.

“Growth in the large industry segment (around 67.8% of industry) picked up at 4.6% y-o-y in October 2025, reflecting a gradual revival in capex demand,” analysts at India Ratings and Research said in a note on 26 December.

After years of borrowing frenzy, companies have shifted focus to reduce debt. The availability of internal funds and market options have also led to fewer borrowers approaching banks. According to a report by Ambit Capital on 23 December, as the corporates continued to deleverage and alternative funding sources gained traction, over the past few years, the corporate loan growth for the banking sector lagged the overall system credit growth.

Given this, Ambit said it sees RBI’s softening policy restrictions to be a signal for strong support of banks to re-engage with the corporate sector as a credit growth engine.

The RBI report also highlighted the rising adoption of the Unified Lending Interface (ULI), with 64 lenders onboarded so far. The number of data services available on the platform has also expanded to 136, from just over 50 a year ago.

Funds raised by banks through private placements, qualified institutional placement and preferential allotment have decreased to their lowest over the last three financial years, the report noted.

Tech-tonic

The RBI report also said that rapidly changing technology could alter how people transact with banks, while also opening up new risks.

“Strengthening risk assessment and improving operational efficiency through responsible technology adoption remain essential, with continued emphasis on financial inclusion, consumer education and protection,” it said.

On the whole, bank balance sheets expanded at a healthy pace in FY25, driven by double-digit growth in deposits and credit, albeit with some moderation, the central bank’s report said.

Factors that stood out for the banking sector included profitability, asset quality and capital ratios. The RBI said profitability remained strong, as reflected in an increase in their return on assets, while asset quality improved further as gross non-performing assets ratio declined to a multi-decade low.

“Banks remain well-capitalized with leverage and liquidity ratios well above the regulatory minimum. These strong fundamentals provide a buffer against risks and support the banking sector’s capacity to sustain credit expansion,” it said.

According to RBI data, the gross non-performing asset (GNPA) ratio of banks declined to a multi-decadal low of 2.2% at end-March 2025 from 2.7% at end-March 2024. Moreover, citing supervisory data, RBI said that at end-September, the gross NPA stood at 2.1%.