Building Trust: The Journey of Strengthening India’s Banking Sector

Building Trust: The Journey of Strengthening India’s Banking Sector

 

 

Expansion of Banking Activity

Between 2015 and 2025, India’s banking system witnessed substantial expansion in both deposits and credit. Domestic deposits increased from about ₹88 lakh crore to over ₹231 lakh crore, while bank credit rose from nearly ₹67 lakh crore to more than ₹181 lakh crore. This growth reflects rising financial deepening, greater household participation, and increased flow of credit to productive sectors across the economy.

 

Improvement in Capital Adequacy

The capital position of banks strengthened consistently over the decade. The overall Capital to Risk-Weighted Assets Ratio rose from around 13 percent in 2015 to over 17 percent by March 2025, while core equity capital also improved significantly. Higher capital buffers enhanced banks’ resilience against shocks and supported sustainable credit growth.

 

Correction of Asset Quality Stress

The banking sector faced severe asset quality stress around 2018 following transparent recognition of stressed loans. Gross non-performing assets peaked at over 11 percent, driven by earlier aggressive lending, economic slowdown, and governance issues. Subsequently, sustained corrective measures led to a sharp decline in bad loans, with gross NPAs falling to nearly 2 percent by March 2025, marking the healthiest position in two decades.

 

Resolution and Structural Reforms

A comprehensive approach focusing on recognition, resolution, recapitalisation, and reforms transformed balance sheets. Mechanisms such as structured asset reviews, time-bound insolvency resolution, bank recapitalisation, and consolidation reduced stressed assets substantially. The merger of multiple public sector banks improved scale, efficiency, and risk management capabilities.

 

Revival of Profitability

With cleaner balance sheets and improved operational efficiency, bank profitability recovered strongly. Return on assets and return on equity moved from negative territory during the stress period to robust positive levels by 2024–25. This turnaround indicates stronger earnings capacity and improved internal capital generation.

 

Performance of Public Sector Banks

Public sector banks recorded notable improvement in business volumes and profits. Total business expanded significantly, net profits rose sharply, and dividend payments increased. These trends indicate restored financial health and improved confidence in state-owned banks after years of weakness.

 

Overall System Performance

The banking system as a whole achieved record aggregate profits in 2024–25, reflecting broad-based improvement across institutions. Early indicators for the subsequent financial year also point to sustained momentum, supported by stable asset quality and healthy credit demand.

 

Evolving Regulatory Framework

The regulatory focus is shifting toward more forward-looking risk management. Proposed adoption of an expected credit loss–based provisioning framework aims to improve early recognition of stress and align domestic practices with international standards, strengthening long-term stability.

 

Future Priorities

The next phase emphasizes stronger deposit mobilisation, productive corporate lending, expansion of green and renewable energy finance, deeper financial inclusion, targeted agricultural credit, global financial integration through international financial centres, and continuous improvement in customer service and digital banking experience.

Multiple Choice Questions

 

1. Which trend best describes the change in domestic bank deposits in India between 2015 and 2025?
2. Moderate growth with periodic contraction
3. Continuous decline due to low savings
4. Sharp expansion reflecting financial deepening
5. Stagnation because of limited banking access

 

2. The rise in Capital to Risk-Weighted Assets Ratio mainly indicates:
3. Reduced lending activity by banks
4. Improved resilience and loss-absorption capacity
5. Higher dependence on government borrowing
6. Decline in operational efficiency

 

3. The peak in stressed assets around 2018 was primarily linked to:
4. Sudden withdrawal of deposits
5. Excessive exposure to household loans
6. Earlier aggressive lending and delayed recognition
7. Strict provisioning norms introduced earlier

 

4. Which outcome best reflects improvement in asset quality by 2025?
5. Increase in restructured standard assets
6. Gross NPAs falling to historically low levels
7. Sharp rise in write-offs without recovery
8. Reduction in credit growth

 

5. Transparent recognition of stressed assets helped mainly by:
6. Concealing weak loans temporarily
7. Improving reported profits immediately
8. Cleaning balance sheets for long-term stability
9. Eliminating the need for regulatory oversight

 

6. The approach combining recognition, resolution, recapitalisation and reforms aimed to:
7. Reduce competition in banking
8. Restore balance sheet health systematically
9. Limit lending to priority sectors
10. Replace public sector banks

 

7. Consolidation of banks primarily contributed to:
8. Reduced branch outreach
9. Improved scale and operational efficiency
10. Decline in customer confidence
11. Higher dependence on foreign capital

 

8. The revival of profitability in banks was largely due to:
9. Higher service charges alone
10. Improved asset quality and efficiency
11. Sharp reduction in workforce
12. Suspension of lending operations

 

9. Movement of return on assets from negative to positive indicates:
10. Increased risk-taking by banks
11. Improved earnings from core activities
12. Higher inflation adjustment
13. Temporary accounting gains

 

10. Growth in public sector banks’ total business reflects:
11. Reduced private sector participation
12. Expansion in both deposits and credit
13. Decline in non-banking finance
14. Exclusive focus on rural lending

 

11. Rising dividend payouts by banks generally suggest:
12. Weak capital position
13. Improved profitability and confidence
14. Declining asset quality
15. Regulatory compulsion

 

12. Record aggregate profits of the banking system indicate:
13. Uniform performance across all sectors
14. Broad-based recovery and stability
15. Elimination of credit risk
16. Complete absence of stressed assets

 

13. A shift toward expected credit loss provisioning focuses on:
14. Backward-looking assessment of defaults
15. Early and forward-looking risk recognition
16. Reduction in capital requirements
17. Elimination of loan classification norms

 

14. Strengthening deposit mobilisation is important mainly to:
15. Reduce customer base
16. Support sustainable credit growth
17. Increase speculative lending
18. Replace capital adequacy norms

 

15. Future banking priorities increasingly emphasize lending to:
16. Only traditional manufacturing sectors
17. Renewable and sustainable energy activities
18. Informal money markets
19. Short-term consumption loans