The Reserve Bank of India (RBI) highlighted on Monday that traditional banks are facing intensifying competition from alternative financial sources when it comes to lending to companies. Simultaneously, the central bank warned that fast-evolving technology could reshape customer transactions and introduce significant cybersecurity threats to the financial system.
Non-Bank Funding Takes a Larger Slice
In its annual Report on Trend and Progress of Banking in India for FY25, the RBI noted a crucial shift. While bank credit growth moderated, the total flow of financial resources to the commercial sector actually increased. This surge was powered primarily by a significant pickup in funds from non-bank channels, with equity markets playing a leading role.
The RBI defines this total flow as an aggregate that includes bank loans, credit from non-banking financial companies (NBFCs), investments by the Life Insurance Corporation of India in corporate debt, and funds raised from overseas markets.
"The increase in funding from non-bank sources during 2024-25 was largely driven by buoyant domestic capital markets," the report stated. It pointed to higher equity issuances, increased corporate bond placements amid easier market conditions, enhanced credit flow by NBFCs, and a rebound in short-term external borrowing as key drivers.
The 45% Milestone
Latest data from the RBI's monthly bulletin reveals the scale of this shift. Up to November 28, non-food bank credit constituted 55% of total resources funneled to companies. The remaining 45% was sourced from non-bank avenues, including equity issuances, corporate bonds, commercial papers, and overseas borrowings. This marks an increase from the 57% share held by non-food credit in the same period of the previous fiscal year.
This trend was foreshadowed by RBI Governor Sanjay Malhotra in August. He observed that large corporations, benefiting from improved profitability, are increasingly turning to market-based instruments like commercial paper and bonds, reducing their dependence on traditional bank loans. Their internal resources have also become a significant source for funding expansion.
Governor Malhotra emphasized that the slowdown in corporate bank credit growth should not be viewed in isolation. The broader flow of financial resources to the commercial sector has seen substantial improvement.
Technology: A Double-Edged Sword
In the same report, the RBI underscored another critical theme: the impact of rapid digitalization. It cautioned that swiftly changing technology could fundamentally alter how customers save and borrow, while simultaneously exposing banks to newer risks, with cybersecurity being paramount.
"Strengthening risk assessment and improving operational efficiency through responsible technology adoption remain essential," the central bank advised. It reiterated the continued importance of financial inclusion, consumer education, and protection in this evolving landscape.
Strong Banking Fundamentals Provide Buffer
Despite these competitive and technological challenges, the Indian banking sector exhibits robust health. The RBI report stated that bank balance sheets expanded at a healthy pace in FY25, supported by double-digit growth in both deposits and credit, albeit with some moderation.
Key highlights include strong profitability, reflected in an increased Return on Assets (RoA), and a further improvement in asset quality. The gross non-performing assets (GNPA) ratio declined to a multi-decadal low.
"Banks remain well-capitalised with leverage and liquidity ratios well above the regulatory minimum," the report affirmed. These strong fundamentals provide a crucial buffer against emerging risks and support the sector's capacity to sustain credit expansion in the economy.
