What are the factors that are propelling growth in the Indian Banking Sector?

 

NOTES ON Banking (for G S Papers) {Prepared on 12.12.2025 } 

For Study purpose only 

 

NB: For any doubts clarification, please refer to the recommended text books 

TOPIC : Banking (with questions 

for 

UPSC(CSE)(Prelims) Exams. ,2026 

Abbreviations: - 

1)AQR: The Asset Quality Review 

2)PCA:Prompt Corrective Action (PCA) framework 

3) IBC: Insolvency and Bankruptcy Code 

4)SARFAESI Act, 2002 :(The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) 

5) DRTs:Debt Recovery Tribunals (DRTs) was raised from ₹10 lakh to ₹20 lak 6)FOSM: physical sales and marketing force to interact directly with customers (Feet-on-street model) 

7)BCs:Business Correspondents 

8)ECL: Expected Credit Loss (ECL) framework 

9)Prudential Framework for Resolution of Stressed Assets 

10)PSBc: Public Sector Banks (PSBs) 

11)RoA: Return on Assets (RoA) at 1.37% 

12)RoE: Returns on Equity (RoE) 

13)Leverage Ratio (which measures the proportion of a bank’s Tier 1 capital to its total assets, serving as a safeguard against excessive risk exposure) 14)SCBs: Scheduled Commercial Banks 

15)CRAR:capital to risk weighted assets ratio (CRAR), defined as the ratio of total capital funds to risk-weighted assets. 

16)NPAs: Non-Performing Assets (NPAs) 

17)GNPAs: Gross NPAs (GNPAs) 

18)NNPA (Net NPAs) 

18)ATM :Automated Tellar Machine

19)RTGS:Real Time Gross Settlement 

20) NEFT: National Electronic Funds Transfer 

21)IMPS: Immediate Payment Service 

22)Crypto currency, digital currency: Money in electronic mode or digital mode (i.e., not paper currency or metal coins) 

23)YoY: Year on Year 

24)RBI: Reserve Bank of India 

25)CAR: Capital Adequacy Ratio 

Note: There will be some questions on abbreviations in clerical level examinations in GK/Banking Knowledge Tests conducted by IBPS/SBI 

QUESTION: What are the factors that are propelling growth in the Indian Banking Sector? 

Ans: 

Comprehensive government initiatives with regards to stress recognition, asset resolution, re-capitalisation, have markedly strengthened the banking sector’s financial health and resilience. This was driven by a series of regulatory measures, which commenced over a decade ago 

1)The Asset Quality Review (AQR) launched in 2015 compelled banks to recognize the true state of their loan books, bringing hidden NPAs to light and strengthening the supervisory framework. Additionally, the Government also implemented a comprehensive 4R’s strategy, consisting of recognition of NPAs transparently, resolution and recovery of value from stressed accounts, recapitalizing of PSBs, and reforms in PSBs and the wider financial ecosystem for a responsible and clean system. 

2)The Prompt Corrective Action (PCA) framework helped restore the health of weak banks, followed by the consolidation of 27 PSBs into 12 by 2020. A detailed review of business in terms of sustainability, profitability, viability and projections along with credit risk related actions have been beneficial. 

3)The Insolvency and Bankruptcy Code (IBC) introduced in 2016, along with complementary out-of-court resolution mechanisms, transformed India’s credit culture and improved recovery processes. It changed the creditor-borrower relationship, taking away control of the defaulting company from promoters/owners and debarred willful defaulters from the resolution process. 

4)Sharper recovery laws: Key legislations such as the SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002) and the Recovery of Debt and Bankruptcy Act have been amended to enhance their effectiveness in asset recovery. 

5)Focused debt resolution: The pecuniary jurisdiction of Debt Recovery Tribunals (DRTs) was raised from ₹10 lakh to ₹20 lakh, enabling them to prioritize higher-value cases and improve recovery efficiency. 

6)Specialized recovery mechanisms: PSBs have established dedicated stressed asset management units for close monitoring and faster resolution of NPAs. The deployment of business correspondents and incorporation of a business strategy that uses physical sales and marketing force to interact directly with customers (Feet-on-street model), has further boosted recovery efforts. 

7)In October 2025, the RBI issued a landmark reform through its Draft Directions 2025, proposing a shift to the Expected Credit Loss (ECL) framework. The framework applies to scheduled commercial banks, including foreign banks, and introduces a risk-sensitive approach to provisioning. These are expected to further support credit risk management practices, promote greater comparability across financial institutions, and align regulatory norms with globally accepted regulatory and accounting standards. 

8)Proactive stress management: The RBI’s Prudential Framework for Resolution of Stressed Assets promotes early identification, reporting, and time-bound resolution of stressed loans, with incentives for lenders to act swiftly 

Question: Why banks ' profitability is in rise ? 

Ans: 

The Indian banking industry has seen robust growth, driven by strong economic expansion, rising disposable incomes, growing consumerism, and easier credit access. 

Digital modes of payments, dominated by UPI, have grown by leaps and bounds over the last few years. 

As per the RBI, India’s banking sector is sufficiently capitalized and well-regulated. Notably, profitability of banks improved for the sixth consecutive year in 2023-24. 

1)From FY 22–23 to FY 24–25, the total Business of Public Sector Banks (PSBs) rose from Rs.203 lakh crore to Rs.252 lakh crore 

2)From FY 22–23 to FY 24–25, net profit increased from Rs.1.05 lakh crore to Rs.1.78 lakh crore 

3)Dividend payouts grew from Rs.20,964 crore to Rs.34,990 crore, reflecting the continued strengthening of financial performance.

4)During FY 24-25, SCBs recorded their highest ever aggregate net profit of Rs.4.01 lakh crore, compared to the net profit of Rs.3.5 lakh crore in FY 23-24. The growth trajectory continues, as SCB’s recorded an aggregate net profit of Rs.1.02 lakh crore in first 3-months of FY26 

5)Continuing on this success, the profitability of SCBs improved during FY 25, with Profit After Tax surging by 14.7% (YoY). Gains in profitability continued with Return on Assets (RoA) at 1.37% and Returns on Equity (RoE) at 14.1%. 

Besides, banks’ capital position remained satisfactory, as reflected in key parameters like leverage ratio (which measures the proportion of a bank’s Tier 1 capital to its total assets, serving as a safeguard against excessive risk exposure) and capital to risk weighted assets ratio (CRAR), defined as the ratio of total capital funds to risk-weighted assets. The leverage ratio for all SCBs was 7.9% in September 2024 (the range of 6 to 8% is generally considered prudent). PSBs are adequately capitalised, with their CRAR standing at 16.4% as of June 2025. 

Strong credit expansion by Non-Banking Financial Companies (NBFCs), that offer services similar to banks, such as loans and investments, but do not possess a full banking license, was accompanied by further strengthening of their balance sheets, improvement in credit quality and profitability, and satisfactory capital buffers. 

Question: What are NPAs in Banking ?How they are being reduced?

Ans: Non-Performing Assets (NPAs). 

Definition: An asset (i.e.,loans given to the public) becomes non-performing when it ceases to generate income (i.e., principal amount and interest amount) for the bank. 

The rise in Non-Performing Assets (NPA) erodes profitability, as banks must allocate more capital to cover bad loans, leading to a credit crunch and constraining lending, thereby affecting overall economic growth. 

As per Reserve Bank of India (RBI) data on domestic operations, aggregate gross advances of SCBs increased from Rs.23.34 lakh crore as on 31st March 2008 to Rs.61.01 lakh crore as on 31st March 2014. Aggressive lending practices during this period along with wilful default / loan frauds, economic slowdown, etc. were observed to be primary reasons for the spurt in the stressed assets. 

Asset Quality Review (AQR), initiated in 2015 for clean and fully provisioned bank balance-sheets revealed high incidence of non-performing assets (NPAs

Gross NPAs (GNPAs) of PSBs have been declining during the last five financial years- reducing from 9.11% to 2.58% between March 2021 to March 2025. Similarly, the NNPAs of PSBs declined to multi-year low at 0.52% in FY 24-25 from 1.24% in FY 22-23. This indicates sustained improvement in asset quality and risk management. The trend has been witnessed in the SCBs too, with a decline in both NPA and GNPA. 

NNPA (Net NPAs) ratio also reached its lowest in last 20 years to 0.52% by consistently declining from its peak in 2018 at 6.1%, driven by stronger provision buffers 

Gist of points: 

Over the past two and a half decades, India’s banking system has undergone a remarkable transformation- from the early days of ATM networks to the emergence of RTGS, NEFT, IMPS, and the revolutionary UPI, now extending its frontier to digital currency. 

1)Bank deposits and credit (domestic) have nearly tripled between 2015 and 2025, with deposits rising from Rs.88.35 lakh crore to Rs.231.90 lakh crore and credit expanding from Rs.66.91 lakh crore to Rs.181.34 lakh crore. 

2)Capital buffers have strengthened- the capital to risk weighted assets (CRAR), which measures capital adequacy, rose from 12.94% in March 2015 to 17.36% in March 2025 with CET-1, which represents the highest quality capital a bank can hold, increasing from 9.98% to 14.81% during the same period. 

3)Asset quality has also improved. Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) have reduced to 2.2% and 0.5% in March 2025 after rising to highs of 11.18% and 5.94% respectively in March 2018. 

4)Profitability of banks has enhanced significantly. Between FYs 17-18 and 24-25, Return on Assets (RoA) increased from -0.22% to 1.37%, and Return on Equity (RoE) jumped from -2.74% to 14.09%.