The approach of a new fiscal year is a time for reflection. As India’s banking leaders look back, they have reason to be pleased. In 2023-24, the sector’s profitability recovered to above pre-pandemic levels, largely due to better net interest margins and lower credit costs. Credit continues to grow strongly and Indian banks’ return on assets reached the highest level in a decade. Banks are also well capitalized—well above regulatory requirements—and have a strong risk profile.
While Indian economic growth is expected to be relatively strong in 2024-25 too, the outlook is uneven. Other risks to profitability include slow deposit growth, higher operational costs and greater competition, particularly from fintech players.
So it won’t be smooth sailing; it never is. Even so, when a McKinsey analysis estimated retail and wholesale banking growth through 2027, it concluded that both would likely see moderate to high revenue growth in every segment. Demand exists and the Indian market is stepping up to meet it.
Different banks face different challenges, but there is a common element: the need for resilience. A McKinsey analysis of 1,100 public companies found that in times of crisis and economic downturns, resilient companies delivered greater returns—and then extended their market lead.
Indian banks have ridden through recent macroeconomic and interest rate volatility with flair. Still, they need to address other challenges to stay robust. Here are three ways India’s banks could improve the present while building strength for the future.
Improve digital infrastructure: Many banks have improved their customers’ digital journeys; among leading banks, 40-60% of retail asset loans are digitally sourced, and 80-90% of personal loans. India is a global leader in digital payments and investment in digital capabilities is growing fast. But the back-ends of many banks still run on legacy systems and there are areas of friction, Among them: security, privacy and core modernization. Broadly, the industry needs to work with regulators to build the infrastructure and policies that can prevent data breaches. Individually, banks need to prepare to comply with the new Data Protection law and install robust cybersecurity functions.
Expand service to new customers and markets: Financial inclusion has broadened greatly over the last decade, and this is a true success story; for example, rural credit demand has grown by more than 10% over the past few years. But India largely remains a credit under-penetrated market; only about half of the eligible population is covered by formal lenders. There is a potential retail lendable base of 320-340 million people, based on factors like age, income and wealth. Formal lenders (including banks and NBFCs) have extended active loans to only 120-140 million. This means that millions of Indians are missing a chance to invest in themselves—and banks are leaving profits on the table. The unmet opportunity is greatest in rural areas and smaller cities and towns. To capture it, banks could focus on creating customized rural products like cluster financing options, enable digital processing of loans via agri-tech partnerships, and work on improving outreach.
Think green: Sustainability-related investments offer great potential. At the moment, only 25% of the green finance investment needed for India to reach its goal of net zero by 2070 is being met. It’s true that many important use cases, such as green hydrogen and carbon capture, are still out of the money. Nevertheless, banks could be more prepared. In general, they lack the expertise to identify new green business opportunities and have limited capacity to underwrite and price climate risk. Only 47% have an environmental, social, governance (ESG) strategy.
Fill the talent pool: Banks depend on two things: trust and people. Despite blips, trust has deepened as banks have successfully reached more and more Indians. But the sector is acutely vulnerable to cybercrime, and every breach erodes trust. To perform better, the right talent is needed for specialist functions, primarily in tech, digital and analytics roles, and India’s banks are falling short on this front. One major concern is the weak credentials of employees and contractual workers; another is that attrition rates are high. Public-sector banks have difficulties; for cost reasons, they are often unable to pay for the quality of service they need to offer.
To draw the right talent, banks may need to rethink their employee value proposition. In addition to compensation, they could consider empowering employees and encouraging collaboration, mentoring new colleagues in a structured approach, and also improve the work environment. One place to start is by asking current employees about their needs and level of satisfaction; ‘talent strategy’ should be a routine topic for C-suite discussions.
Complacency is not an option. In fact, it would be a huge mistake. History demonstrates, time and again, that the good times do not always keep rolling. All in all, Indian banks have had a good year and are financially strong. But as our javelin champions Neeraj Chopra and Annu Rani can attest, it takes relentless work to stay ahead.