Competition from equity markets and technology will keep banks on their toes: RBI

Mumbai: The Reserve Bank of India (RBI) said on Monday that banks will continue to face competition from non-bank sources in lending to companies, while fast-changing technology could change how customers transact and pose cybersecurity risks.

In its report on trends and progress of banking In India, the RBI said that notwithstanding a moderation in bank credit in FY25, total flow of financial resources to the commercial sector increased. This was driven by a pick up in flow from non-bank resources, led by the equity markets, it said.

RBI defines the flow of financial resources to the commercial sector as the aggregate of bank loans, loans from non-banks, and investment by Life Insurance Corp. of India in corporate debt, apart from funds raised overseas.

“The increase in funding from non-bank sources during 2024-25 was largely driven by buoyant domestic capital markets, reflected in higher equity issuances and increased corporate bond placements amidst easing market conditions, enhanced credit flow by non-banking financial companies (NBFCs), and a rebound in short-term external credit,” it said.

45% and rising

According to the latest data from RBI’s monthly bulletin, non-food bank credit accounted for 55% of total resources to companies up to 28 November, while the remaining 45% came from non-bank sources. These included equity issuances, corporate bonds, commercial papers and overseas borrowings, among others. The share of non-food credit was at 57% in the same period of FY25, the data showed, pointing to an increase in the share of non-bank sources. Non-food credit is bank credit adjusted for loans given to the Food Corporation of India.

In August, RBI governor Sanjay Malhotra said although the rate cuts had been quickly transmitted to money markets, large companies were increasingly relying on market-based instruments such as commercial paper and corporate bonds to source funds, reducing their reliance on bank credit.

“Also, as the profitability of large corporates has increased, their internal resources have become an important source for business expansion,” he said. Malhotra’s point was that although credit growth slowed in 2024-25, the broader flow of financial resources to the commercial sector has significantly improved, and that the slowdown in corporate borrowings should not be viewed in isolation.

Tech-tonic

The RBI report also said rapidly changing technology and digitalisation could change the way people transacted with banks for their savings and credit needs, while also exposing the banking system to new risks.

“Strengthening risk assessment and improving operational efficiency through responsible technology adoption remain essential, with continued emphasis on financial inclusion, consumer education and protection,” it said.

On the whole, bank balance sheets expanded at a healthy pace in FY25, driven by double digit growth in deposits and credit, albeit with some moderation, the central bank’s report said.

Factors that stood out for the banking sector included profitability, asset quality and capital ratios. The RBI said profitability remained strong, as reflected in an increase in their return on assets, while asset quality improved further as gross non-performing assets ratio declined to a multi-decade low.

“Banks remain well-capitalised with leverage and liquidity ratios well above the regulatory minimum. These strong fundamentals provide a buffer against risks and support the banking sector’s capacity to sustain credit expansion,” it said.