The Indian banking sector finds itself in a curious position. Financial metrics — profits, balance sheet strength, and non-performing assets — are all at their best levels in years. Yet, this good news is tempered by a persistent lack of credit demand from large corporates and a plateauing of demand from the retail segment.
At the Business Standard BFSI Insight Summit 2025, a session titled ‘Is it time to revisit the banking model?’ — moderated by Vikas Dhoot — brought together top bankers to discuss how the industry must adapt to this evolving landscape.
Bankers agreed that the opening up of acquisition financing has created a new avenue for growth and a fresh profit pool for the Indian banking sector. This, in turn, has sparked calls for a reinvention of India’s traditional banking model, which has long relied on corporate loans, project finance, and retail credit to drive asset growth. However, banking heads at the summit emphasised that reinvention is a continuous process and that the industry constantly adapts to the evolving external environment. They also pointed out that lending is just one of many activities banks engage in, and they have several other levers to grow their net interest income (NII).
“It’s not that companies have stopped borrowing from banks altogether. In recent quarters, we’ve seen new opportunities in loans to middle-market corporates and small and medium enterprises (SMEs). In the second quarter (Q2) of 2025-26 (FY26), demand returned from corporates, thanks to the economic momentum created by the cut in goods and services tax rates. Depending on opportunities across business segments, banks are now in a much better position to meet customers’ needs,” said Prashant Kumar, managing director (MD) and chief executive officer (CEO) of Yes Bank, speaking at the panel.
According to K V S Manian, MD and CEO of Federal Bank, change is a continuous process in banking, but the cycle of change is now faster than ever. “Recent regulatory changes have opened new growth opportunities in areas such as acquisition and capital market financing, which were previously off-limits. As the complexion of opportunities evolves, banks will have to think differently and move towards specialisation,” he said.
Manian added that banks must rethink “plain vanilla” lending and focus more on specialised segments, even within project finance and corporate lending.
Rajiv Anand, MD and CEO of IndusInd Bank, said that the slowdown in fresh corporate borrowing is not surprising, given that over the past five to six years, companies have deleveraged their balance sheets and strengthened cash flows, reducing their need for long-term external financing. Moreover, many new avenues for raising capital have opened up in recent years.
“However, we should remember that banks don’t only do lending, but we also do lending,” Anand quipped. “As a bank, we must have the ability to serve customers across the capital structure. At some point, you’ll make NII on loans. At another, you’ll make fee income. Sometimes you’ll use your balance sheet to generate income, and at other times, you’ll focus on transactions and customer relationships.”
Anand observed that the debate over whether corporates will continue to borrow from banks misses the broader picture. Corporate banking, he said, will always remain a crucial part of banks’ balance sheets, but lending alone will never be enough.
He also observed that the overall growth environment has improved. “Growth picked up in Q2FY26 as the economy transitioned from fiscal and monetary tightening two years ago to fiscal and monetary easing in recent months.”
Bankers agreed that the RBI’s recent decision to permit acquisition financing will further support growth in the industry. “Acquisition financing has long been a demand from the industry, and we are glad the RBI has finally allowed it. If the economy is to grow at 7–8 per cent annually, bank credit must expand by 13–14 per cent per year. I see that happening now, following the central bank’s recent policy changes,” said Manian.
Anand added that acquisition financing has opened up a profit pool that was previously cornered by foreign banks.
Bankers also said that the recent trend of foreign investors taking stakes in mid-sized private-sector banks will help these institutions scale up faster and pave the way for the emergence of new top-tier banks in India.
Manian said that retail lending will continue to drive banks’ balance sheets, despite the recent slowdown.
Meanwhile, Anand underscored the importance of adopting artificial intelligence (AI) strategies. “The use of AI in banking reminds me of 2013, when we were just launching mobile banking and doubted its long-term potential. Now, the majority of banking transactions happen on mobile,” he said.
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