Indian Banking in the Digital Age: Managing Strengths and the New Fault Lines

Outperforming global peers financial parameters and ensuring higher profitability while adhering to prudent Risk Management — the Banking Sector in India is based on strong fundamentals and stands as a beacon to the ever of everchanging volatility of the Financial markets and Resultant economic turbulence.

On a positive note, deposits and credit has grown in double digits in 2024-25, gross NPA’s have dropped to 2.1 per cent and the Indian Banking Sector has exhibited significant resilience. More than 57 crore Jan Dhan accounts have turned financial inclusion into a mass movement, linking families to banking. Banking employment nearly doubled over two decades… Total employees increased from 8.6 lakh to 18.1 lakh, with private banks accounting for 46 per cent and PSBs 42 per cent.... Officer share rose from 36 per cent to 76 per cent… indicating skill intensification and preference for higher-value roles.

A McKinsey analysis has reported that around 82 per cent of the total liabilities for Indian banks are funded through deposits, as compared to 60 -75 per cent banks in the US and EU.  Seventy per cent of total deposits come from individuals and households in India, significant in that retail lending has grown showcasing a high credit growth multiplier historically with respect to GDP.

The Indian banking system today stands at a unique crossroads. On one hand, it continues to outperform many global peers on key financial parameters, profitability, asset quality and capital adequacy while on the other, rapid digitalisation has introduced new and complex challenges relating to cybersecurity, consumer protection and operational resilience.

According to the Reserve Bank of India’s Trend and Progress of Banking in India report, scheduled commercial banks have recorded sustained double-digit growth in credit and deposits in recent years, alongside a sharp improvement in asset quality. Gross non-performing assets (GNPA) have declined to multi-decade lows, reflecting improved underwriting standards, recoveries and prudent risk management.

A key structural strength of Indian banks lies in their liability profile. A large share of bank funding continues to come from deposits, especially retail deposits. In India, household savings still flow predominantly into bank deposits, unlike in advanced economies where banks rely more heavily on wholesale and market-based funding. This deposit-led model provides stability, lowers funding risk and enhances resilience during periods of global financial stress.

On the asset side, retail lending has emerged as a major growth driver.Deposits surged from INR 18.4 lakh crore to INR 241.5 lakh crore and advances from INR 11.5 lakh crore to INR 191.2 lakh crore during FY05-FY25signalling scale expansion of the banking system but the speed is much faster in the case of advances.

Credit-Deposit (C-D) Ratio increased from 69 per cent in FY21 to 79 per cent in FY25 . India’s credit growth has historically displayed a strong multiplier effect with respect to GDP, significantly higher than the global average. This reflects deepening financial intermediation, rising household incomes and expanding access to formal credit. Retail credit housing, personal loans and MSME financing has played a critical role in sustaining economic momentum.

However, the digital transformation that has enabled this expansion has also created new vulnerabilities. India’s banking landscape has been fundamentally reshaped by technology. Digital banking, fintech partnerships and real time payment systems have transformed customer experience and operational efficiency.

The Unified Payments Interface (UPI) has emerged as a global benchmark in digital payments, processing billions of transactions every month and embedding cashless payments into everyday economic life. Mobile banking has become mainstream, with banks integrating digital services across the customer lifecycle from account opening and KYC to credit assessment and servicing.

Private and public sector banks alike have invested heavily in digital platforms. Flagship applications and end to end digital journeys have increased customer convenience, reduced transaction costs and expanded financial inclusion.

Artificial intelligence and machine learning are increasingly being deployed for credit underwriting, fraud detection and personalised financial services, benefiting first time borrowers and underserved segments. Digitalisation is also blurring traditional regulatory boundaries. Many of the financial activities are now being unbundled and delivered through non-financial platforms and arrangements involving both regulated and un-regulated entities, that do not fit neatly within the existing regulatory scope of RBI.

Oversight of such activities is often fragmented among multiple financial and non-financial regulators with no single authority having a comprehensive, end-to-end view of the entire activity chain and risk transmission pathways. Hence, regulatory actions taken within individual mandates may be sound in isolation yet collectively may not fully address such cross-cutting risks.

The challenge lies in the ability of sector-specific regulatory frameworks to remain coherent when digital financial activity cuts across them by design. Fragmentation across jurisdictions further complicates the oversight of digital financial activity. Data is a core asset. As financial institutions collect and process vast amounts of sensitive, personal and transactional information, they have become increasingly attractive targets for cyberattacks.

The use of technologies for fraudulent activities like impersonation, fabricated identities, and synthetic content is reducing the reliability of traditional checks dependent on stable identity and familiar patterns. The challenge is to come out with regulations promoting innovation while enhancing safeguards for operational resilience.The Guidance Note on Operational Risk and Resilience issued by RBI is a good example.

However, despite improvements in customer services, rising Consumer Grievance continue to be a matter of concern for India’s banking system. Consumer education and protection needs to be a policy priority while ensuring a robust grievance redressal.  The RBI’s Trend & Progress of Banking in India 2025 report also highlighted the need to combat emerging digital and cyber enabled frauds as part of strengthening customer protection.

Bank frauds have witnessed a decline from 1.3 trillion rupees in 2021 to 604 billion Indian rupees in 2023-24. Technological integration through digital banking, UPI transactions and fintech partnership have reshaped retail banking. Yet, proportionate increases in digital frauds and cyber security threats have been reported. 

The Digital Age has ensured that every aspect of banking — from Account opening to Credit Assessment has been re-engineered through digital tools, fundamentally altering the sector operating models.  The Unified Payments Inter (UPI) processed over 11.4 trillion transaction in a single month in recent years underscoring its widespread adoption and Banks have responded by integrating UPI into their digital ecosystem . Mobile banking has become mainstream with private banks leading the way and the public’s appetite for unified digital banking services has been exemplified by SBI’s YONO app, which surpassed 100 million downloads by 2023.

The RBI has supported the digital momentum through strategic initiative like the Digital Banking Units (DBU’s), Central Bank Digital Currency (CBDC), or ‘e’ Rupee in pilot form.  AI & Machine learning incorporated into operations enable banks to deploy chatbots, offer tailored investment services and make informed lending decisions which have benefitted first-time borrowers with limited credit histories.

However, the rise in digital interfaces has led to cyber vulnerabilities. In 2022-23 banks reported over 10,000 crores in digital frauds highlighting the critical need for robust cyber security systems.  Biometric authentication, real-time fraud monitoring, encrypted protocols, educating customers on safe digital practices, Regular Security audit are some ways banks have tried to combat the increasing threats.  For the new age customer, speed and convenience are relevant and technology has responded by introducing AI underwriting and digital KYC which have made the process of opening an account or getting a loan instant and seamless. 

In the digital race, fintech and first neo-banks like Razor pay and Jupiter have disrupted the flow by offering Zero balance accounts, intuitive interfaces and real time analytics.  During 2024-25 the share of card / internet frauds were 66.8 per cent of total cases being largest share by number, while frauds related to advances (33 per cent) constituted highest share by value.

RBI, India’s Central Bank continues to accord high priority to develop measures to curb digital and cyber enabled frauds. The revised Integrated Ombudsman Scheme will come into effect from July 1, 2026, thereby aiming to provide a cost-effective, expeditious, non-adversarial alternate grievance redress mechanism for the resolution of complaints against Regulated Entities (REs). Central and State cooperative banks have been allowed access which are slated to strengthen customer confidence. Comprehensive instructions covering advertising, marketing and sales of financial products and services are being proposed by RBI to prevent mis-selling as well as reviewing existing instructions on conduct related matters associated with recovery agents and recovery of loans. However, mere guidelines and issuance of instructions won’t suffice, as it will be tough to rein in rigidities and entitlements in a diverse socio-economic geography.

Cybersecurity in banking is an ongoing process which needs a hyper vigilant dynamic approach to combat the complex nature of cyberattacks. Review of customer liability in unauthorised electronic banking transactions are being proposed in view of shifts in the banking topography involving new payment channels and evolving fraud patterns. Enhancing customer safeguards and ensuring vigilance in CIPHER - Cyber Security and Privacy Framework for Privately Held Information Systems, Network Security Surveillance are constantly evolving tools to curtail cybersecurity threats. As Indian banking enters a more mature phase of digital transformation, the policy challenge is no longer about adoption, but about governance at scale. The next phase must be anchored in three clear priorities.

First, Cyber Resilience must be treated as systemic risk, not merely an operational concern. This requires deeper supervisory scrutiny of banks’ cyber preparedness, mandatory stress testing for cyber incidents, tighter oversight of third-party and fintech dependencies, and board-level accountability for technology risk. Investments in cybersecurity must be viewed as capital expenditure on trust, not as discretionary IT spending. Second, Consumer Protection frameworks need to evolve in step with digital complexity. Faster grievance redressal, clearer liability frameworks for unauthorised transactions, stronger internal ombudsman mechanisms and deterrence against mis-selling are essential to preserving confidence in digital banking. Financial literacy and customer awareness must become integral to banks’ business strategies, not peripheral initiatives.

Third, regulation must continue to balance innovation with prudence. Sandboxed innovation, proportional regulation for new digital products, and data-privacy-centric governance will be critical to ensuring that technological progress does not outpace risk controls. The objective should be to enable innovation without socialising its risks onto customers or the financial system. India’s digital banking revolution has reshaped customer expectations, but not uniformly. In urban India, digital payments now dominate everyday banking. UPI alone accounts for about 85 per cent of digital transaction volumes, fostering expectations of instant service, seamless interfaces and rapid grievance redressal. Relevance of inclusive banking remains vital for policy revisions. There is a significant traction in both deposits and credit growth in Rural, Semi — Urban and Urban areas, but decline in Metro areas during H1FY26, compared to H1FY25 . In Metros, incremental deposits growth contracted by 34 per cent to INR 3.4 lakh crore and credit growth contracted by 14 per cent to INR 3.6 lakh crore, while there is a significant jump of deposits in semi-urban areas and credit in rural areas.

Rural and semi-urban customers, though increasingly digital, continue to value trust, accessibility and human support. Despite steady progress reflected in the Financial Inclusion Index of Reserve Bank of India, gaps remain in infrastructure, digital literacy and fraud awareness. Consequently, rural expectations centre on reliability, clear dispute resolution and guided assistance through branches and Business Correspondents.

Addressing regional disparity within India is also important.Persistent regional disparities in credit deployment show that Southern, Western and Northern regions dominate high CD ratios, while Eastern and North-Eastern regions lag behind, indicating uneven development. Some big states like Odisha, Bihar, Jharkhand and West Bengal have CD ratio below 52 per cent. District-wise concentration indices, reveal the top 10 districts holds around 43 per cent of deposits and 49 per cent of credit. While the top 100 districts hold deposits of 75 per cent and credit of 77 per cent. The rest of 643 districts holds business of around 25 per cent.

The challenge for banks is thus to balance scale with sensitivity and inclusion. As Unified Payments Interface drives near-universal digital adoption, success will depend on pairing high-speed innovation with strong consumer protection and differentiated support ensuring technology advances inclusively, without eroding trust, the core currency of India’s banking system.India’s banking system has demonstrated that it can grow rapidly without sacrificing stability.

The task ahead is to ensure that speed does not erode trust, and convenience does not compromise security. In a digital economy, confidence is the ultimate currency. Preserving it will require constant regulatory vigilance, responsible bank leadership and an unwavering commitment to consumer interest. The strength of Indian banking in the coming decade will be measured not only by balance-sheet metrics, but by its ability to combine innovation with integrity and technology with trust.

Neelesh Dwivedi is among Senior Management of a PSU Bank and Sameera Saurabh is currently Adviser to Government of India; views are personal