India’s banking sector stands at the cusp of unprecedented growth, fueled by a combination of robust economic fundamentals, technological advancements stringent regulatory and legal reforms.

Over the years as the Indian banking system developed at a fast pace, it played a crucial role in financial inclusion and leveraging the digital infrastructure to make banking more accessible to a larger section of the society. To sustain the ongoing advancements, banks will continuously need to strengthen governance by focusing on areas of compliance, risk, and audit functions.

The banks will need to consider various enablers like new business avenues, processes, people, and overarching technology in order to drive them. In the next decade, banks will need to set some priorities and use advanced technologies for business growth, streamline processes and build talent resilience.

Also, there is a need to beef up the process of quick resolution of stressed assets under the Insolvency and Bankruptcy Code (IBC) to improve the credit culture in the country.  To do that, the government should increase the number of judicial benches for identification and acknowledgement of a default and hasten up the timeframe of pre-IBC admission stage for faster settlement of stressed assets.

Even though the Indian banking sector has a lot of work in hand to make it more efficient and robust to be future ready, nevertheless it has already taken some significant strides. A World Bank G20 report stated that in just six years, it has achieved a remarkable 80% financial inclusion rate- a feat that would have taken nearly five decades without a robust digital public infrastructure.

India is among the fastest-growing FinTech markets in the world with its fintech estimated to become US$150 billion by 2025 from US$50 billion in 2021. Digital payments are projected to constitute nearly 65% of all payments by 2026, as opposed to 40% of transactions in 2022. This will lead to 7x growth in digital merchant payments from US$0.3-0.4 Trillion today to US$ 2.5-2.7 Trillion by 2026 and the value of digital payments in India is projected to increase three-fold from US$3 Trillion today to US$ 10 Trillion by 2026.

The stability in repo rates over four consecutive quarters, coupled with well-capitalised banks and soaring market valuations, particularly among medium-sized PSU banks, underscores the regulatory stability and investor confidence in the sector. The forecasted real GDP growth in the range of 6.5-6.7% for FY24, amidst upward revisions by economic agencies, augurs well for the banking industry, reflecting a positive economic outlook.

Let’s turn our heads to the profitability of the Indian banking sector. Banks in India have witnessed substantial profitability, with profits soaring to ₹2.3 trillion at a staggering 35% year-on-year growth rate. Strong growth in interest and other income, coupled with enhanced operational efficiency, underscores the sector’s resilience. Marginal improvements in return on assets (ROA) and return on equity (ROE) signal healthy financial performance, further bolstering investor confidence.

Along with profitability, credit growth has surged, driven by strategic mergers in banking sector, while changing deposit preferences reflect evolving consumer behaviours amidst rising interest rates. Declining gross non-performing assets (GNPAs) and robust risk preparedness underscore the sector’s resilience in navigating uncertainties.

Recently, JP Morgan and Bloomberg announced India’s inclusion in its Global EM Bond Index and EM Local Currency Government indices, respectively. This can lead to India attracting foreign investments of around US$30-40 billion over the next five years and freeing up an equivalent amount of domestic capital for the private sector. The private sector banks, in particular, have garnered significant foreign investor interest, owing to their superior growth prospects, quality management, and consistent profitability. Top global investors, including Capital Research and Management Co., BlackRock Inc., and GIC Private Ltd., are eyeing Indian banks for investment, further bolstering the sector’s appeal.

Geopolitical shifts and changing investment dynamics are expected to further propel foreign investment into India’s banking sector. Investors are redirecting their attention to India’s banking sector due to shifts in geopolitical dynamics. Japan’s SMFG invested ₹1,300 crore in SMFG India Credit Co Ltd to drive growth, while MUFG made substantial investments in Indian non-bank lenders, including DMI Finance, and proposes to acquire a 20% stake in HDB Financial Services, further highlighting India’s allure to global investors.

The Indian banking sector too may play a significant role in the government’s disinvestment plan which is aimed at reducing the government intervention across sectors. In FY 2024-2025, the Indian government aimed for an ₹50,000 crore disinvestment. This leads to the first strategic disinvestment of a bank post the April-May general elections. IDBI Bank, formerly public-owned, serves as a pivotal test case for the New Public Sector Enterprises Policy. The policy reflects a belief in the private sector’s capacity to foster business expansion.

While all these changes have come in to draw fresh capital, the introduction of the IBC has improved the credit culture by resolving stressed assets with better recovery rates. Importantly, it has set such deterrence that large bad loan cases are getting sorted before reaching the IBC gates. In terms of value, the IBC has helped resolve ₹3.16 lakh crore debt stuck in 808 cases in the seven, a recent Crisil Ratings report said. On average, creditors have realised 32% of the admitted claims and 169% of the liquidation while other past mechanisms had an average 5-20% recovery rate.

To sum up, we can say that India’s banking sector presents a compelling investment proposition for foreign entities, underpinned by strong economic fundamentals, technological prowess, and regulatory stability. As the nation continues its trajectory of robust growth, investors stand to benefit from the myriad opportunities unfolding in one of the world’s most dynamic banking ecosystems.

—The authors of this article are Rajesh Narain Gupta, Founder & Chairman, and Aniket Rajpurohit, Principal Associate at SNG & Partners.